The early stages of a business startup typically include “go with your gut” moments. The very nature of a business launch supports decision-making on the fly. After all, you’re exploring uncharted territory, requiring innovation, just to get off the ground. While the same intuition that told you it was a good product or service may be enough to keep your business afloat during the early days, you’ll eventually want access to meaningful data, beyond a gut feeling.
Key Performance Indicators (KPIs)
For better or worse, measuring performance is an important professional pursuit. Until you’ve identified areas in which your business is thriving and others where you’ve dropped the ball, it’s difficult to make meaningful adjustments. Solid data can help you keep tabs on individual points of interest, as well as facilitating greater overall understanding of how the moving parts interact, creating your organization’s operational flow.
Revenue and profit figures are natural reference points for small business owners seeking performance feedback. Although the information is better than nothing, basic statistics paint a limited picture, lacking some of the details required to make subtle business improvements. Key performance indicators (KPIs) provide additional tools for measuring progress and productivity.
Analyzing various KPIs allows entrepreneurs to look closely at particular business functions, answering questions about their most pressing performance concerns. Tracking KPIs not only helps owners evaluate how an entire organization is doing, but the tools can also be used to assess individual units, projects, and employees, as required.
Key performance indicators provide financial insight and other information business owners use to
- evaluate performance in real time,
- establish well-informed strategic goals,
- make prudent decisions and adjustments.
Making the Most of Key Performance Indicators
Just like other tools in your businesses toolbox, KPIs provide the greatest benefit when they are used properly. To do so, it is important to define your organization’s goals and assign measureable, actionable features to your objectives.
Are you in a growth phase, working to develop a larger customer base? If so, adding an achievable number of new customers by a particular date represents a measurable goal you might choose to establish and track, using KPIs. Adding new businesses is a goal shared by many commercial ventures; some other objectives are unique to particular enterprises. KPIs allow custom analysis for your business, based upon data you choose to track.
A brick and mortar retailer, for example, may benefit from sales per square foot calculations, while an online seller may be more interested in conversion rate information and details about shopping cart abandonment. Matching your goals with suitable KPIs provides the most useful feedback.
Although each expectation is unique, in her recent mediafeed article, April Maguire suggests all KPIs should meet four criteria, at a minimum. The KPIs established for your business should be:
- Actionable – Tracking performance metrics is a job, in and of itself, but it is also a piece of a larger initiative. The most valuable feedback is used to identify potential changes that may benefit your bottom line – taking action completes the circle, making use of the data.
- Measurable – When sifting through data, the last thing you need is ambiguity. The best KPIs are easily measured, returning clear results you can bank on.
- Timely – KPIs track changes over time; logging accurate results requires multiple reference points. To complement old information, your KPIs should also include the most up-to-date data available.
- Tangible – Whatever goals you have outlined for your business, KPIs should help you move toward achieving them. Improved KPIs should result in tangible impacts, or you may be looking at the wrong metrics.
Popular KPIs Assist Small Business
Each commercial venture has unique finance and operating requirements, so the most relevant KPIs are different from one business to the next. Widely-tracked performance indicators used by small businesses include:
Cash Flow Forecast – Cash flow forecasting provides a valuable reference point, because the data cuts right through to an organization’s bottom line. The calculation provides clues about sales and margins, furnishing information small business owners can use to identify cash flow problems and make appropriate adjustments.
To calculate a cash flow forecast, start with business savings added to the anticipated cash value for the next four weeks, then subtract cash out for the four-week period. The forecast can be used to anticipate cash flow surplus and shortage as well as assist with tax planning and acquiring financing.
Gross Profit Margin as a Percentage of Sales – Profitability is related to spending and sales. Measuring gross profit margin as a percentage of sales helps business owners understand total profits, compared to sales. To calculate the figure, start with your gross profit margin (GPM), derived from your gross profit amount divided by your sales. Divide the value by your sales, to identify how much of your gross profit margin comprises overall sales. Multiply by 100 to illustrate gross profit margin as a percentage of sales.
Tracking this KPI keeps owners informed about how much money their holding on to, compared to the amount going out the door to suppliers. A noted decrease may indicate an organization is spending too much money, while an increase in gross profit margin illustrates more money is being retained by the company.
Relative Market Share – In addition to studying internal performance metrics, small business owners also benefit from understanding how their businesses stack up against external forces. One important performance indicator to consider for external clues, relative market share represents the amount of the overall market controlled by your company.
Losing market share undermines your future; tracking this KPI allows for adjustments to improve your long-term outlook.
Funnel Drop-off Rate – Sales are lost at various points during the deal making sequence, as visitors abandon your conversion process on the way to a sale. Funnel rate drop off isolates the phenomenon, highlighting trends in your sales process that may be hurting you. Tracking this KPI is particularly valuable to modern sellers that frequently close deals without interacting face to face.
Revenue Growth Rate – Annual growth, year upon year, separates short-lived business enterprises from enduring operations. This simple calculation shows growth, decline, and stagnation, illustrating the rate at which a company’s sales change over time. Revenue growth rate comparing current year sales with last year’s would divide total present year sales by the prior year’s total, identifying the annual rate of growth.
Inventory Turnover – Of particular value to retailers, tracking inventory turnover showcases an organization’s ability to move units – a primary objective for most companies. Incorporating a time parameter makes the information more valuable, allowing small business owners to project future flow, based upon the number of units sold during a given period in the past. Used as a baseline reference, inventory turnover rates also help with financial planning, forecasting a seller’s future cost of goods.
Key performance indicators provide a set of tools for evaluating various aspects of professional performance. Data gleaned from KPIs can help you make informed decisions about your business, but the valuable resource is only as effective as your commitment to track metrics and apply the findings.