Your business cannot grow if it doesn’t measure the things that are most important to it.
No matter the niche or size of the business, there are only a few things that matter.
But every day the business owner is constantly bombarded with information and distraction that it loses focus on what matters most.
This can be dangerous and affect the growth of the business.
But thanks to Key Performance Indicators, instead of tracking every possible metric, business owners can focus on just a few to know how the business is performing and what they need to do to improve performance.
What Are Key Performance Indicators?
A key performance indicator (KPI) is a quantifiable measure that helps business owners track the performance of the business concerning its business goals.
KPIs help business owners focus on the most important areas that would help them achieve success, as they have defined it at the end of the day.
They are also important to show how well the business has performed and helped guide the business owner’s decisions on possible ways to improve performance.
The difference between a KPI and a metric is that the KPI can be tied to specific business goals and objectives.
Importance Of KPIs
KPIs are important for small businesses because: –
1. They help business owners quickly track how well the business is performing on a weekly or monthly basis to make strategic decisions faster, rather than wait till the end of the quarter when it may be too late.
2. They are important to ground the business in reality. KPIs provide a more realistic measure of how well the business is doing because it measures the performance that is critical to its success or failure.
Many times, businesses track the number of metrics, many of them unimportant to their operations and often misleading.
3. With KPIs, business owners are not only aware that their revenues have increased, or their sales have decreased over time, but they are also able to track the drivers of such changes and easily take specific corrective steps instead of the usual blanket tactics.
3 Steps to Set Up KPIs for Your Small Business
1. Strategic Goals
The first step to take in setting up effective KPIs for your small business is to make sure your business goals are S.M.A.R.T.
The choice of what KPIs to choose and how to use them would be based on the business goals you want to measure.
If these goals are unclear, unrealistic or without a defined time, then all your effort would be in vain.
To avoid this, you have to set goals that are S. M. A. R. T. which means they are specific, measurable, attainable, relevant and time-bound.
I want to emphasize relevance here because your business goals must be critical to the success of your business. You should be able to connect your goals to the long-term mission of your business.
A good example of a smart goal is “Increase our revenue by 5% in 12 months.” With this example, the goal is specific, you can measure how we are performing since we stated a target of 5%, it is achievable, revenue is relevant to your business, and we have a timeframe to achieve this goal – 12 months.
2. Choosing Relevant KPIs
With our business goals set, the next step is to choose the metrics that can be used to measure our goals.
There are many KPIs small business owners can choose from, but the best KPIs must be relevant to your specific business needs and be able to measure the goal(s) they have set to achieve.
Continuing from the example in the first step, what are the key performance index we can use to measure revenue?
The answer is Revenue Growth Rate.
The revenue growth rate tells you the percentage growth in revenue compared to the previous period.
You can see that the KPI we choose to measure revenue is relevant to the goal we set to measure.
There are many other KPIs that small businesses typically track, in addition to other customized KPIs.
I have divided them into Financial and Not Financial KPIs.
a. Financial KPIs – Working Capital, Advert spend, cashflow forecast, gross profit margin, expenses, burn rate, account receivable turnover, sales conversion rates, etc.
b. Non-Financial KPIs – Website and store traffic, customer attrition, customer satisfaction, employee satisfaction, etc.
3. Track Key Performance Indicators
If you stop at the second step, all your effort so far would have been in vain.
Without tracking your KPIs regularly, you would benefit from setting KPIs.
This is why this step is very important.
To effectively track your KPIs, you must set a regular time for evaluating your performance in different areas of your business.
You can do bi-weekly or monthly bookkeeping to evaluate your performance concerning your business goal and take appropriate action.