Keeping track of growth and progress is a crucial part of leading a business. Without knowing what areas the business is thriving in and what areas the business is struggling in it is like are stumbling in the dark trying to figure out the best road to take. Most business owners and managers know this, but the challenging part is figuring out how to best do it. Utilizing Key Performance Indicators (KPIs) is a productive way to measure and analyze progress in your business.
Not sure what KPIs are? Key Performance Indicators are a type of business metric that “…evaluate the success of an organization or of a particular activity (such as projects, programs, products and other initiatives) in which it engages.” (Wikipedia, Performance Indicator).
Remember growing up and receiving report cards in elementary school? The report card did not just have one number or letter grade on it. It was filled with information about your in a variety of categories. Some were academic, while others were social. Think of these as your scholastic KPIs.
When we looked at that elementary school report card, there wasn’t just one overall letter grade at the top. A variety of factors were measured. The same thing goes with KPIs in a business. Managers need to determine a few KPIs and not just look at one aspect of the company in order to determine how close the business is to meeting its goals.
So, how do you come up with KPIs for your business? It is important to know some “shoulds” and “should nots.”
Key Performance Indicators…
Should not just be financial
It is tempting to measure your business’s success only in terms of finance, but if you are, you are missing the bigger picture. Investopedia points out, “A business’ success depends on more than its balance of cash and debt; it depends on its relationship with its customers and employees”
Also, financial indicators are generally considered to be lagging, which means that they only really show you what already happened. A lagging indicator does not predict what will happen. It is important to have a variety of KPIs to help you to both examine the past and predict the future. Keep in mind, you can use past financial data to help make decisions about the future.
Should be well thought out
Deciding what the KPIs for your business are should not be a hasty process. You will need to have defined goals and a clear vision for your company already in place, and you and your management team should take the time to determine how to measure success for each goal. Here are some examples of KPIs: Conversion rate of lead to sale, net profit margin, employee turnover, website traffic, social media traffic, customer complaints, number of customer calls in, employee overtime hours etc…. The KPIs you choose should reflect your business.
Should be specific to your business
Your parents probably told you that just because everyone else is jumping off a bridge doesn’t mean that you should too, right? The same principle goes with KPIs. The key performance indicators that you determine for your business are not necessarily the same as someone else’s—even if that business is in the same field. That being said, if you are in the middle of deciding on your KPIs, taking a look at another business can help give you some guidance.
Different departments should have different KPIs
As mentioned above, you want to stay away from having only financial key performance indicators. Some of the variety of your KPIs will come naturally as each department of your business comes up with KPIs. The marketing team should have different performance indicators than the sales team, and accounting and human resources might look at other data to evaluate performance.
Should be quantitative and measurable
This is key. The point of having key performance indicators is that they help you to collect data and information about your business, which will ultimately guide your decision making for the future. Data that is quantitative is easier to look at and compare over time. For example, are you looking to see how your email marketing campaign is going? Perhaps you decided to look at the number of people who unsubscribed from your emails this past month. Did it increase from the previous month? If the percentage of customers or leads unsubscribing from your emails continues to grow each month, you probably want to make a change with your email marketing.
Should not be looked at in a vacuum
Each individual KPI should not be looked at separately—especially if the results are negative. Remember the example from above about unsubscribing from emails? An increase in people unsubscribing from emails can seem really bad until you take a look at the rest of your business and the outside world: Have you recently cut back on your marketing budget so the emails are not as high of quality? Or, did you try something new this month and increase the number of emails? It could even have nothing to do with your company. Is it January and many people are feeling bogged down by the number of email lists they were added to during the Christmas season?
Key performance indicators are very helpful with guiding your business, but make sure to take a look at the bigger picture before making any rash decisions based on one KPI.
Looking for more information about Key Performance Indicators, and how they can be used to help your business grow? Contact Lucid Accounting and Finance!