How does your business measure up? The right KPIs can be valuable guides as you work to build a stronger business.
Every business is a work in progress. Chances are, you’re constantly on the lookout for ways to boost productivity, grow revenue or strengthen customer relationships. But understanding your business’s performance requires more than a casual assessment. The details on your balance sheet don’t tell the whole story.
That’s why businesses rely on key performance indicators (KPIs). These business metrics are tied to specific business goals, where progress (or lack thereof) can be quantified with relevant data – providing important feedback about the effectiveness of your processes and business decisions.
Effective KPIs tend to have a few things in common:
- They are clear and actionable, indicating areas where you can make tangible improvements.
- They are measurable and represent a specific time frame.
- They show conditions that impact your bottom line, whether directly or indirectly.
KPIs Play Many Roles
Small-business KPIs can address many different areas. For instance, you and your business partners may focus on strategic KPIs, which are high-level, long-term measurements. Revenue growth and ROI, for instance, show whether your approach supports or hinders financial performance.
Based on your strategic goals, KPIs focused on operations or business functions may look at short-term activity or specific processes.
Some metrics offer short-term information that can show you where you’re headed. These are called leading KPIs. Long-term indicators that show what you’ve already achieved are known as lagging KPIs. Both types are important.
Here’s an example: The number of sales leads that your team pursues (a leading indicator) could help to predict your sales volume in the next quarter or year (a lagging KPI). While you may be seeking a specific result (growing your sales), tracking your sales leads right now provides a concrete way to measure your progress.
Which Metrics Matter?
Financial health matters to every business. That’s why certain financial metrics are among the most important KPIs for small businesses. These include:
- Operating cash flow
This shows how much cash your company generates through day-to-day activities. This can answer questions about company spending or whether you need to accelerate receivables.
- Gross profit margin
Changes in this margin, relative to your sales, can show how much you’re affected by things like supply costs, overhead or the pricing of your products or services.
- Quick ratio
This financial ratio shows your capacity to pay off short-term liabilities with available cash or cash equivalents, making it an important measure of your financial health and preparedness for business or economic challenges.
- Revenue growth
Do you need to plan for seasonal fluctuations? Are members of your sales force underperforming? By watching for revenue changes over time, you can get a sense of trends and issues to address.
- Inventory turnover
This tells you how many units of a product were sold in a specified period, which can influence pricing decisions, marketing plans or inventory orders.
- Customer acquisition cost (CAC)
How much does it cost to win new customers? The answer may tell you if it’s time to explore new strategies, such as expanding to new markets or marketing channels.
Other KPIs to Consider
Businesses come in all shapes and sizes, so choose KPIs that matter to your industry, business model and goals. Get input from your leadership team and relevant departments to make sure everyone is on the same page.
You may rely on:
- Customer service KPIs
Keeping your customers happy starts with understanding their experience. Metrics such as monthly customer service calls, average resolution time and reported customer satisfaction can help you measure the quality of your service.
- Sales and marketing KPIs
Nonfinancial data provides insight into the effectiveness of your sales processes by telling you how many leads were engaged or the average sales conversion time. Similarly, marketing metrics such as website traffic and click-through rates can help you gauge your online engagement.
- KPIs for other functions
Many other business areas can provide useful indicators, too. For instance, on the human resources side, tracking recruitment, employee satisfaction and employee turnover can show where support is needed. On the IT side, measuring system downtime or IT service tickets for a given period can help you identify factors that impact productivity.
- Business-specific KPIs
Your business model will also determine your best KPIs. A brick-and-mortar retailer could measure sales per square foot, while a hotel would look at revenue per available room (revPAR). If you work in e-commerce, you might focus on KPIs such as your website conversion rate or shopping cart abandonment rate.
Turn Insights Into Action
KPIs bring value only when they inform decision-making. Make sure you’re using KPIs that are relevant and well-monitored. Business software and online tools can provide efficient ways to view trends.
Over time, your KPIs can serve as crucial guideposts – and help you mark important milestones – as you work to align your team and processes with your most important business goals.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Amegy Bank.