When running a business, you may start out using gut instinct and some quick checks to keep an eye on how your business is performing. But as your business grows, using such unstructured checks will land you in trouble sooner or later.
To keep a good check on both the financial and non-financial parts of your company you need some structured and well thought out KPIs for SME businesses.
KPIs should be objective rather than subjective when keeping a check on the health of your company.
What are KPIs for business?
KPI stands for Key Performance Indicators. KPIs are metrics that can help you chart progress towards a variety of business goals — from finance, supply chain management to marketing & sales. They are not just for large business. KPIs for small businesses, are an equally powerful tool for a business of any type and size.
KPIs are a measurable value applied to business objectives or goals and can be used across a whole range of your business.
Why should I use KPIs?
As a business owner, getting vital key performance indicators for in place will be invaluable in your business decision-making process and will undoubtedly help you to drive your business forward and grow. You need to sense check and measure the ‘health’ of your business continuously and ensure that you are spending time and money on the right areas to achieve your business objectives.
KPIs will give you following benefits:
- help to clarify the current business position and performance expectations.
- provide a point of reference for benchmarking in the past and the future.
- allow you to focus on important areas within your business that should have your attention.
- will help you produce a more consistent approach to achieving business goals.
- act as great motivators for you and your employees to focus on company goals.
- accountability – theyll highlight both good performance and under performance.
What are financial KPIs?
Financial KPIs measure business performance against specific goals, for example a KPI around profit or revenue.
They are designed to report on your businesss financial health of your business against a wide range of factors, such as internal benchmarks, competitors, or other industries.
Keeping an eye on your business’s finances and performance is essential to your long-term success. In this blog, we look at examples of financial KPIs.
What are non-financial KPIs?
Not all your key performance indicators need to be focused on finance. Indicators that arent about your numbers are just as important when it comes to understanding the full story behind your business, your people, and your customers.
Below, we look at examples of KPIs that dont focus on finance.
How do I choose the right KPIs?
The critical question for business owners is which KPI should you choose for your business?
The needs of different businesses will vary from one another, a KPI that works for one business, wont be relevant for another. So, when choosing KPIs for your business, you need to understand the key metrics that work for you. For example, a brick-and-mortar retail shop may not focus as much on website traffic and an e-commerce company wouldn’t concentrate on sales per square foot.
Where you are in your business lifecycle will also determine what important KPIs to track. For example, when you’re starting up, if you don’t have a deliverable product yet, you don’t need to worry about things like cost per acquisition or lifetime value of clients.
Many businesses also keep track of things like customer lifetime value, number of new customers, conversion rate, average customer value, market share etc. If its an important metric then you should track it and set a KPI.
You should ask yourself these questions:
What is the ultimate objective you want to achieve?
Why is this objective relevant to your business?
What measurable information can you use to define progress and success or failure?
What information do you need to show that you’ve achieved your goal?
What time frame will you use for the KPI to track this progress?
What variables influence the outcome of the objective & do these need measuring?
Leading vs lagging Key Performance Indicators
You need to also think about your performance measurement including both leading indicators and lagging indicators.
Lagging indicators are historical and track things that have already happened in the past. So, for example, sales for the last quarter or income per salesperson.
Leading indicators keep track of inputs and are important to show how likely you are to meet your strategic goals. For example, conversion rates, lead totals, pipeline.
How to measure KPIs?
A good KPI is one that is measurable and relates directly to your strategic goals. However, not all are necessarily the same.
Let’s look at just one example of a good KPI:
If your revenues are down for the year, you’ll want to track sales stats to monitor if you have an improvement in income. You may set a goal to increase revenue by 15% over the next 12 months. More revenue = more profit, so relevant to set this goal for your business.
To achieve this goal, you may hire more salespeople or focus on cross selling to current customers. You can check the figures every month, tweak the things you’re doing to achieve this goal.
All your KPIs should be SMARTER. SMARTER stands for:
Using this framework, ensures you set relevant, realistic goals and ensure you measure and evaluate them over a specified period.
Small Business Financial KPIs
Your gross profit margin shows how much of your revenue is profit after deducting expenses like the cost of production.
Gross profit: Revenue - cost of sales
Gross profit percentage: Revenue - cost of sales / sales x 100
Net profit margin shows you what percentage of your revenue was profit. It differs from gross profit margin, as it considers all expenses, not just direct costs.
(Total revenue – Total expenses) ÷ Total revenue = Net profit margin.
This helps you to set future goals or benchmarks for profitability. Using this and gross profit margin, you can easily see if your non-operating expenses are too high and decide if you need to cut costs.
Working Capital includes assets such as available cash, short-term investments, and accounts receivable. It demonstrates the liquidity of the business (the ability to generate cash quickly).
Working Capital is calculated by subtracting current liabilities (financial obligations) from current assets (resources with cash value).
The most common failure of businesses is badly managed cashflow.
Even if you’re a profitable business, it’s important to pay attention to cash flow because even great companies can struggle if they don’t monitor their cash flow.
There are several different cash flow KPIs (for example free cash flow and cash flow margin) but net cash flow and cash on hand are probably the most useful.
Current Ratio reflects on a company’s ability to pay all the financial obligations in a year. This financial KPI considers a company’s current assets such as account receivables, and current liabilities, such as account payables.
Less than one indicates that your company will not be able to fulfil all obligations unless there’s an additional cash flow. It’s generally felt a healthy ratio is between 1.5 and 3, but fast-growing companies do often have a ratio less than this.
This shows whether a business has sufficient short-term assets to cover its near-future liabilities. It can give a more accurate overview of financial health than the Current Ratio as it ignores liquid assets such as inventories.
Expressed in days, receivable days show how long it takes to get paid for goods sold on credit. This KPI shows how effective you are at collecting cash when invoices are due. Your target receivables days should be similar to your invoice terms (i.e. 30 days).
For many sectors, inventory can be a large line item on the profit & loss statement (P&L) and for these sectors inventory tracking is crucial.
There are again, various KPIs for inventory, including inventory days, gross margin return on inventory and cash conversion cycle.
Non-financial KPIs are just as important to understand the true story behind your business, your people, and your customers.
What are the non-financial KPIs should I track?
Your core non-financial KPIs should always be linked to your strategy and to your vision statement.
Measuring your customer service can be vitally important for businesses focused on long-term relationships. You can measure customer satisfaction (Net Promoter Score (NPS) is an industry standard) or you may want to measure customer retention and customer attrition. Customer acquisition can also be key to measure.
SERVICE & GOODS
How do you monitor the quality of your services and goods and that the quality is appropriate? This may depend on if you a premium brand or low-cost brand.
People are vital to the success of the business, so it’s essential that that you can measure how satisfied the team is feeling, and how loyal they feel towards the brand. Some KPIs here are:
Employee Satisfaction / Net Promoter Score
Employee Turnover / Retention
SALES & MARKETING
Number of leads is often tracked in businesses but the conversion rate for converting leads to clients is often not so well tracked. Tracking this may allow you to put better sales processes and training in place for the sales team. It can also help to make future staffing decisions. You may want to track key marketing stats like click throughs on email campaigns, website statistics or social media engagement.
Maybe you run a customer helpline and should track new tickets raised, resolved and resolution time. You may need to measure product defect rates or efficiency if you are a manufacturing company. If your company manages large projects for clients, you may need to track projects that are late or behind schedule.
As well as monitoring things over a short period, but you need to also look at long term trends in your business. It’s about context and stepping back to look at the bigger picture.
With technology, it’s now possible to churn out a huge amount of data. However, as a business owner, it’s important that you don’t get ‘bogged down’ with too much data and worrying about metrics that are less important.
Think about where you are now and where you want to be in the future. Which figures must you track to ensure you reach your goal?
As your business grows, don’t be afraid to adjust your Key Performance Indicators and goals.
Remember that running a business without tracking KPIs is like driving a car without a steering wheel! Every business should have some KPIs they need to track.
Here at DNS Accountants, we work closely with our clients to help them pinpoint the correct KPIs and build them into management reporting.
Talk to us about setting the right company KPIs.