In this episode of the Cultivating Business Growth Podcast, we are discussing KPIs, or Key Performance Indicators. The goal of this episode is to help you understand the importance of KPIs, the various types available to you and how to determine which ones are most important for your business.
What we cover in this episode:
- 1:20 – Definition of KPIs
- 3:48 – Financial KPIs
- 4:40 – Financial KPIs – Revenue growth
- 5:50 – Financial KPIs – Cost percentages
- 9:44 – Financial KPIs – Balance sheet strength
- 12:08 – Financial KPIs – Receivables turnovers
- 12:40 – Financial KPIs – WIP turnovers
- 13:18 – Nonfinancial KPIs – Sales and marketing
- 16:46 – Nonfinancial KPIs – Productivity
- 17:35 – Nonfinancial KPIs – Vacancy rates
- 17:58 – Nonfinancial KPIs – Turnover rates, customer satisfaction
- 18:50 – Don’t do too much too fast
Definition of KPIs (Key Performance Indicators)
Key Performance Indicators are defined as a quantifiable measure used to evaluate the success of an organization or employee in meeting objectives for performance. So far in our Strategic Planning series, we have set goals, broken them down into actionable steps, and now we need a way to gauge our progress. That’s where these KPIs come into play. KPIs give direction and tell us how we are doing.
There are many guides to KPIs available out there, but a few that we liked were by BSC Designer and Hubspot. Your CPA or business advisor would have more information and other tools available but these are some good free resources available to you.
We have mentioned KPIs in prior episodes, but we will be digging deeper into some of the financial and non-financial KPIs available.
Financial KPIs look at the financial health of the business. It is best to look at these on a monthly basis and analyze how you are comparing from the beginning of the year to current. KPIs also allow you to look at trends cyclically from last year at this time to now. Some of the most common and impactful financial KPIs are explained further below.
Revenue growth – Revenue growth is a good place to start. This KPI is based on comparing where we set our goal to where we are now. It can help you analyze if you are reaching your quarterly and annual goals you established as you progress through the year. Another effective way to measure is by partnering nonfinancial goals with goals like revenue growth. For example, you could look at new clients won for the year side by side with your revenue growth. By counting the number of new clients (a non-financial KPI), you can look at your sales goals vs. what you’ve actually accomplished and if those goals need to be adjusted to meet quarterly or annual targets.
Cost percentages – The dollar amounts and goals you’ve set are important, but you also want to wrap your head around what your percentages look like. As your revenue grows, your costs will grow too. You want to manage by percentages when it comes to COGs (Cost of Goods Sold) or overhead. By watching the relationship of the percentages, you can make sure they are in line with expectations, compare to industry standards and potentially find ways to perform more efficiently. Some of the costs you would want to analyze under this category would be labor, software, equipment, materials, and overhead.
You want to set target KPIs, so you can compare and make sure you are in line with what you would expect those costs to be and industry standards. For our clients, we have software that helps pull information together with financials of their business so it offers a good side by side. If you work with a CPA or advisor, ask them for help in pulling standards for your industry so you can potentially improve performance. If you don’t currently work with an advisor, BizStats is a good free resource.
Balance sheet strength – Most business owners are more focused on their P&L (Profit & Loss statement) or are more cash flow based. There is tremendous value in knowing the strength of your business when it comes to the balance sheet.
The balance sheet is your picture in time of what you have (assets) and what you owe (debts and liabilities). Your bottom line is your equity. You will want to make sure you’re watching the strength of your balance sheet and your strength in equity. If you don’t currently have balance sheet strength, you want to make sure you understand that so you can work to improve it.
Your balance sheet tells us how well we can go into the future. Outsiders can view the balance sheet and tell how strong the company is and whether your company is in a position that you could easily get a loan from a banker.
Receivables turnovers – Receivables turnover is an important KPI to pay attention to if you have any issues with cash flow. If your KPI for this is in bad shape, your cash flow can take a nosedive. It’s a component of the company that can get lost in the details as you grow.
Non-financial KPIs are just as abundant as financial KPIs and there are many options available to track your progress. Non-financial KPIs are looking at things like people, clients, advertising, and turnover. We will break down a few of the most popular non-financial KPIs.
Sales & Marketing KPIs – There are a ton of sales and marketing KPIs you can establish, but we cover a few examples in this episode. If you want to increase the number of leads, you would want to look at conversion rates from ads to clicks or conversions from free consult to client. You could make improvements and test things like your text and images used to improve your conversions. You could also compare different marketing channels (i.e. organic search vs. social media vs. live events) to see where you are getting the highest number of leads and the cost to get each one.
Productivity – This is a KPI relating to your team. Are they producing what they should be? Are they efficient? If the answer is no, it could be your processes or software that need revisions. It could also be performance, which has to be addressed as well but this gives us the opportunity to see areas for improvement.
Vacancy rates – If you are in the business of renting out properties, vacancy rates are a useful KPI to track. If you have high vacancy rates, you can begin asking questions to fix it. Is it related to the market? Are there things you could be doing in marketing or advertising that could improve your rates?
There are many more non-financial KPIs like turnover rates for employees, turnover rates for clients, customer satisfaction, etc. Just like with financial KPIs, your goal is to find the most impactful items for your business and focus your efforts to gain traction and begin making changes.
Don’t do too much too fast
Focus on the most impactful KPIs first. What are your goals and what do you need to measure first to get you there as quickly as possible? Then, you have to establish how you are going to monitor those things. Once those KPIs are doing well, you can make sure they stay within a certain threshold and potentially expand to more KPIs. We don’t want to simply give up because we have paralysis by analysis. Every improvement we make is going to further our business.
Soul searching could be needed if you don’t know where to go. Ask yourself, what are your biggest concerns as a business owner? If you aren’t driving enough revenue, maybe some of your marketing KPIs could be a focus. If you’re making a ton of money but it’s all going out the door, you may need to analyze the industry stats. You know a lot of the problem areas in your business and can look at KPIs that relate to those things to make incremental improvements.
We define KPIs (Key Performance Indicators) and discuss the importance and what they mean for your business.
We dive into some examples of financial and non-financial KPIs, using some popular examples that have helped our clients in the past. It may be useful to pair a financial KPI with a non-financial KPI as well for further analysis.
Do the soul searching needed to establish meaningful KPIs that will have the biggest impact to push you toward your goals. Know that you want to establish goals for KPIs and standards that you would like to reach. Start small and go from there. Each step forward is still a step forward. You will learn as you go and those incremental improvements are better than falling backward, or worse, not even looking at all.
Links mentioned in this episode: