As a business owner, it’s critical to have a good understanding of how your business is performing. After all, keeping a close eye on the health of your business is how you’ll determine whether your current strategies are working, or if you need to adopt new ones.
Key Performance Indicators (KPIs) are metrics that will help to determine this. But with thousands of KPIs to choose from, which metrics matter most? And are you currently using the right ones?
With the new financial year upon us, it’s a great time to review your current business plan, and the metrics you’re using to measure success.
Why KPIs matter
Your business is made up of many moving parts, and while each of those parts can spark some interesting insights, the reality is that you can’t, and shouldn’t track absolutely everything. Not only would you not have enough time in the day to facilitate this, but you wouldn’t be generating insights that you can actually work with – insights that matter. Tracking too much can also contribute to you losing focus.
KPIs keep you (and your team) accountable. They help to ensure each of the moving parts within your business are all moving in the right direction, and with purpose.
Which metrics matter most?
There are a few things that might influence which KPIs you choose to measure the success of your business. For example, the structure of your business and the industry you operate in. If you have multiple departments within your business, it’s quite common to have multiple KPIs set out for each of those departments. Whereas small business owners will often work with a smaller more concentrated set of KPIs.
Something your KPIs should all have in common though is that they need to relate directly to your business goals AND be effective indicators of performance.
No matter what industry you operate in, a great place to start is to first identify your key goals. From there, narrow your focus to the metrics that have the biggest influence on your goal – this will determine what your KPIs should be. Assign a couple of KPIs against each goal you set out.
Here’s an example:
If an objective of your business is to improve your company culture, you could measure the participation rate of your staff benefits program. But this doesn’t give you the real answer you’re looking for – are your staff happy? In this scenario, a more effective indicator of performance might be to look at staff retention (i.e. you want to see a decrease in resignations).
Carefully selected KPIs can also assist you to direct your energy – something that’s often spread thin in small business. Best practice is having both ‘leading’ and ‘lagging’ KPIs. A leading KPI will help you identify challenges before or whilst they occur, whereas a lagging KPI will tell you what has happened in the past. For example, if you are wanting to track new sales growth (lagging), a reduction in number of sales calls made (leading) is an indicator that you may not hit your target for new sales for the month. By tracking the leading indicator, you can ramp up your lead generation activities during the month to shore up new sales success.
Which KPIs are best suited to your industry / profession
Depending on which industry you operate in, there are a range of different KPI sets that you could use.
In determining some KPIs for our own business, we recently came across a great site, which provides a library of KPIs by different industries and professions. We’ve included a snapshot below with links to more information.
We suggest you start tracking a couple of KPIs from each relevant area to your business, then decide what is going to be your main focus for the month or quarter. You can circle through focus KPIs depending on your business strategy. For example, this quarter you might focus on getting more people to your website, once you’re happy with the traffic you’re generating, you might shift focus to your conversion rate (how many website visitors transact with you), next your focus may shift to lowering the customer acquisition cost, increasing cart spend or ensuring customers buy from you more than once.
By tracking multiple, but laser focusing on one or two, you’ll also recognise that pulling one lever can have impacts on multiple KPIs. For example, say you decide to increase conversion rate (Marketing KPI) by lowering your prices; you will find that your Gross Profit Margin (Financial KPI) will fall, meaning you have to sell more units to make the same money. Through considering both KPIs you’ll be able to better plan and decide ‘how’ you action your business strategy.
Please don’t hesitate to get in touch if you’d like some help. Through our Business Advisory program, Swell we can help you with selecting, tracking and understanding KPIs for your business.
To learn more about Lemonade Beach Accounting, Tax & Business Advisory Services, please follow the links below.