How do I set business KPIs and use them effectively?

Measuring business performance

How well is your business performing? Don’t really know? That response is surprisingly common.

Alternatively, you may think your business is doing well or badly or somewhere in between. However, the value of whatever you believe is limited if it’s based on assumption rather than factual evidence. You could be wrong.

You might think you’re performing better than you are, which can prove damaging or even fatal, for example, if you try to grow beyond your means. Your business may be performing better than you realise, which can also hold you back. For example, it could prevent you from growing your business because you don’t think you can afford it.

If you want to better manage your business, control its destiny and make well-informed decisions, you need to know precisely how well your business is performing. This is where KPIs can really help you.

What is a KPI?

KPI stands for key performance indicator. Basically, a KPI is a value or metric (ie standard of measurement) that you can use to assess overall performance or whether your business is achieving a vital business objective.

Small businesses normally have six to ten KPIs, expressed clearly in numbers or percentages. KPIs vary from business to business. Larger businesses use different sets of KPIs for multiple levels of their operation. High-level KPIs focus on overall business performance, while low-level KPIs normally have a departmental focus on sales, marketing, HR, etc.

Potentially, there are hundreds of KPIs, so, you need to select ones that are most indicative and useful to your business.

The business benefits of setting KPIs

Working with KPIs can enable your business to become more efficient and productive. They can help you (and your employees if you have any) to focus on what’s vital to the survival and success of your business.

Choose the right KPIs, monitor them diligently and take action where prompted, and KPIs can make a big difference. If you don’t set KPIs or monitor them closely and regularly, the potential risks are very real.

KPIs can enable you to reliably identify where your business is performing well. You may be able to increase activity in certain well-performing areas so you can be more successful. KPIs can also act as a reliable early-warning system, showing where performance is below the required level or worse, which could enable you to improve and boost your bottom line.

What KPIs do businesses often choose?

KPIs are more often than not linked to financial aspects of running a business. Whether daily, weekly or monthly, KPIs are expressed in numbers or percentages and common examples include:

• turnover/total sales
• net/gross profit margin
• net revenue/income
• sales growth
• net unit sales/sales volume
• net online sales
• inventory turnover
• new leads/customers/contracts
• customer/client retention rate
• percentage market share
• client/customer satisfaction rating
• cost-per-sale/customer
• operational cash flow/working capital
• material/supply costs
• customer acquisition cost
• cost savings

Some businesses (usually larger ones) use employee-related KPIs, such as staff-absence rate, employee-satisfaction rate, employee churn, etc, while others create KPIs relating to marketing (eg website traffic, page views, cost of customer acquisition, etc).

The trick is to concentrate on a manageable number of the right indicators, rather than pick the wrong ones or choose too many so that the task of monitoring becomes too much. “Measure what matters” is a popular business mantra.

KPIs – in summary

KPIs can allow all businesses to measure their performance against key business objectives. You need to measure what matters and use the information to minimise your costs, maximise your sales and keep your cash flow healthy. If you don’t have a reliable way of understanding exactly how well your business is performing – how can you ever really hope to become better?