Key Performance Indicators: What Are KPIs?
The internet makes key performance indicators (KPIs) seem like the gold pot at the end of the rainbow of business management. And thus, these metrics are shrouded in so much mystery that the search for the perfect KPIs becomes an unachievable quest. Let me part the clouds of mystery for you, because KPIs aren’t as complex as you may think.
Deciding on KPIs for your small business can be as simple as deciding what is most important to your business goals and tracking that. So what is important? There really isn’t a “have to” when it comes to KPIs, but there are certainly some “highly recommended” KPIs.
Selecting and Reviewing KPIs
In the world of KPIs there are daily drivers (KPIs you should take to and from work with you consistently) like revenue, cash balance (or change in cash balance) and profit margins.
At a minimum, I recommend reviewing at least these 3 on a very regular basis. By very regular, I mean at least monthly. Keep in mind, what is regular for your business depends on YOUR business. If revenue, cash and profit margins are all pretty consistent from month to month and have been for the last 5 years, you probably don’t need to take a detailed look at your financials very often. A quick glance every month will help you identify whether anything major has changed.
If your business is constantly changing with tight cash reserves, you may be checking your revenue and cash balances on a weekly or even daily basis, and your profit margins on a monthly basis.
Developing KPIs for a Small Business
The first stop in the journey toward discovering your KPIs is to decide how much time you have to review your financials on a monthly basis. If you plan to spend hours sitting down with your board or financial advisor every month, then you can have a more significant number of very detailed key performance indicators. But if the second Friday of the month has approximately an hour and a half allocated to “financial review,” then 20 to 30 KPIs is way too many. In order to realistically allocate some time to adequately review metrics, I recommend somewhere between 5-10 metrics max.
At their core, KPIs are simply a list of things that you want to keep an eye on. It’s okay if you track different metrics than other businesses, they may have different goals. KPIs differ from company to company and can change over time!
So what KPIs should you use for your business right now? Go back to your goals. What are your core business goals? Increased revenue versus last year? Increased profit?
Was the increased revenue in a particular product line? If so, perhaps one of your KPIs, in addition to revenue, cash balance and profit margin, should be that particular product line’s revenue. A subcategory of a larger KPI like revenue can be essential in accurately tracking your progress toward this type of goal.
Other Metrics Businesses May Track
What other metrics could you track? Maybe the key to the growth of your business and the profit of your business is headcount and the size of your payroll. This is a metric I track very closely for high-growth startups. Knowing what your monthly payroll is and how much it’s growing as your business grows in relation to (think percentage of revenue) revenue can be really helpful in understanding how your headcount affects your other business goals.
There could also be some expenses that you want to track like marketing spend (more Google Ads = more revenue) or travel and entertainment (the food and travel spending was way too high last year and needs to be monitored to keep costs down this year).
Another metric is gross profit over time. If revenue is going up, but gross profit (revenue minus cost of goods) is going up, that can help explain why there is less cash in the bank for the same amount of revenue. Maybe you have shifted toward products that cost more to produce or the inputs for your products have become more expensive over time.
In essence, key performance indicator tracking is all about deciding what you need to keep an eye on to meet your business goals and then watching those items at least monthly. Your business will change over time, and your KPIs can change over time as well. Don’t be afraid to try tracking different KPIs to find what works best for your business!