If you want to grow your business, you need to know how to use KPIs. Your KPIs – key performance indicators – help you better understand your company’s performance, success, and where you can improve.
Goals lead to employee success too!
Employees are over 3x more likely to stay with a company when they have goals that must be met. KPIs set the bar for employees and businesses, giving everyone something to aim toward.
Which KPIs Matter?
Your business’s KPIs will be determined by your:
- Focus
- Goals
- Objectives
- Targets
- Competition
We like to categorize KPIs into two main categories: predictive and historical. If you don’t know where to start with your key performance indicators, sales is a good place.
Why?
If you don’t have sales, you’ll run out of money – guaranteed. WeWork, a company valued at $47 billion in 2020, entered into bankruptcy last year even after securing $13.8 billion in funding because of excessive growth and a lack of sales.
Sales set limits, and they’re easy for you to measure last week, month or year. If you have sales, you can then set the benchmark for many other things – one of which being the most important: cash flow. You might make a sale and get paid immediately in retail, but in construction, you may be paid in milestones or after the job is complete.
You can set KPIs for all of these sales and sales-related metrics, which will allow your business to better budget for the short and long term.
And when you’re monitoring the right sales KPI, you can start taking faster action if sales are down or up. For example, you can have KPIs to monitor:
- Orders
- Backlogs
- Bidding
- Proposals
If any of these KPIs are down, there could be a problem in the future, even if it isn’t one right now. Predictive KPIs provide the performance insights you need to make adjustments today because a problem is imminent.
For example, you may be able to adapt to slumping data by:
- Decreasing your workforce
- Slowing jobs to avoid having to pay overtime
- Bidding on jobs that you wouldn’t normally bid on just to stay afloat
KPIs are guides that outline how your business is performing, but how many KPIs are too few or too many?
How Many KPIs Should You Focus On?
It’s easy to go overboard and track every KPI under the sun, but in reality you should only focus on the 6-12 metrics that matter the most to your business.
You may need to experiment to find the right number for your business. It’s worth the time to find that balance because:
- Having too few KPIs will mean that you’re not measuring enough and may miss things.
- Having too many KPIs will mean that you’ll get lost in the weeds and struggle to focus on the things that matter most to your business.Identify the KPIs you want to track based on your financial plan for the year. Speaking of your financial plan, when you create it, make sure that you also set targets for your KPIs.
Common KPIs in Business and What They Tell You
There are hundreds of potential KPIs that your business can focus on, but some are more important than others to your individual organization. Common KPIs that are relevant to most businesses include:
- ROI: Return on investment. If you have money tied up in an investment, ROI will help you understand the return. In general, you can use ROI to measure the return you’re getting on your investment into the business.
- Revenue per Full-Time Employee: Are you expanding your team? If so, you can use this KPI to measure whether they are providing a return to the business.
- Accounts Receivable and Days Outstanding: This KPI is important for cash flow management. The lower your days outstanding, the quicker your business is receiving cash from customers, which means you have less money tied up in accounts receivable. On average, a number below 45 is considered good, but that fluctuates depending on the industry.
- Inventory Turnover: A key indicator of your efficiency in managing inventory. The higher the turnover rate, the better.
- Cash-to-cash Cycle Time, Also Known As Cash Conversion Cycle (CCC): A metric that measures how long it takes to complete a sales cycle, from manufacturing to paying suppliers.
- Gross Profit and Gross Margin: Gross profit is the revenue left over after subtracting the cost of goods sold, and gross margin is the percentage of gross profit divided by revenues.
- Customer Acquisition Cost (CAC): This KPI represents the cost efficiency in gaining new customers.
- Lead Conversion Rates: This helps you understand the effectiveness of your sales processes.
- Customer Retention Rates: Loyalty and satisfaction indicators that you can use to improve repeat business.
4. How Often Should You Check Your KPIs?
KPIs give you a sense of where your business is at right now and where it’s headed. To put this data to work for you, it’s important to track and monitor KPIs regularly – at least once a month. Some of you may want to look at your KPIs weekly.
When you check your KPIs regularly, you can spot trends and take action as needed.
If you notice that something is changing in your business, dig in, see what it means, and take action. For negative trends, taking a proactive approach will allow you to resolve the problem before it escalates. For positive trends, digging in means that you can maximize opportunities to invest in your business and grow.
For example:
- Let’s say that sales are trending upward. Should you use this opportunity to invest in new equipment or more talent?
- Suppose proposals/bids are up significantly. Do you need to start planning for ramping up production or do some hiring to meet potential demand?
- Maybe your sales are going up, but repeat purchases are down. Investigate this trend. Is there a quality issue with your product, or do you need to follow up with customers?
In both of these scenarios, being proactive can help improve the business’s performance.
Final Thoughts
Once you know how to use KPIs the right way, it will be a transformative time for your business. Monitoring your performance with predictive indicators is just one of the many ways that key performance indicators can guide your decision-making and allow you to maintain an agile operation.
Do you want to learn more about KPIs or schedule an appointment? Click here.