Determining Key Performance Indicators for your Business
Photo by Estée Janssens on Unsplash
Any business, regardless of ultimate objectives, should have some method of identifying and measuring Key Performance Indicators, known as “KPIs” to ensure things are on track. It can be challenging as an owner to not only run your business but to then also have to work on the business and establish these “KPIs” but it’s imperative you do it.
Why you ask? It’s impossible to know the health of your business without having a way to measure its performance. You may say “well I’m making money and covering my costs so that’s enough” and I would argue that not having certainty about the exact revenue, costs, and profit is not setting you up for success in the future. Things change all the time so you could go from making some amount to being in debt pretty quickly if you aren’t monitoring these things.
It’s also important to remember that some of the standard measurements or KPIs aren’t the only things to consider. Maybe you as a business owner want to get out of the day-to-day of the business so a KPI could be allocation of your time during the week, etc. Essentially, you should build your KPIs around your specific business and not use some cookie cutter approach to setting and measuring goals.
So how do you decide what KPIs you should use in your business? Unfortunately, this isn’t an easy question and it isn’t something that anyone else can answer for you (including me). You can take some steps to try to determine what would make the most sense and this short article will hopefully help you get started.
1) STEP ONE: Before you can even begin to think about KPIs, you need to determine your vision for the business over at least the next year and hopefully the next 1-3 years.
There are some questions you can ask yourself to help you lead to this vision, such as:
a. Why did I build this business in the first place? What is the purpose of it?
b. How do I help the people I serve in my business? How do I want to serve them?
c. What is my role in the business? Am I currently in that role? How long will I be in this role?
d. Do I want to grow? How big do I want to grow and what is the timeline? Does that require more employees? More capital? How will I get there?
e. If I imagine the business in one year, two years, and three years, what does it look like?
2) STEP TWO: Hopefully you could spend the appropriate time and space on the first step and you’ve established some clarity around what you want your business to look like over the coming years. Now you can refine the vision by creating 3-5 measurable objectives/goals that align with your vision for the business.
For example, if you want your business to grow and you want to step into a CEO type of role in the next year years, you might consider some of the following goals that will allow you to get closer to that vision:
a. Grow top line (gross) revenue by 30% in 2022 to support future growth
b. Research talent acquisition in your industry and create a roadmap before the end of 2022
c. Streamline and document all processes so future employees can easily be trained and free up your time to run the business
Remember that when you’re establishing goals, they should be large and broad directives that are then made up of very specific tasks over the year. Also, you want to keep these to 3-5 at most so you don’t distract yourself from the most important objectives of the business.
3) STEP THREE: Now that you have your vision and goals, it’s time to determine actionable things you can do over the year that align to your overall goals/objectives. These should be items you can work on consistently over the entire year.
To continue our example, if we take the first goal of “Grow top line revenue by 30%”, some specific tactical items that can be accomplished each and every month include:
a. Create a systematic way to measure revenue on a monthly basis and determine where the majority of revenue is coming from (ex. e-commerce/online sales, storefront sales, referrals, etc.).
b. Create profit-and-loss statement and pro-forma (projections) that can be tracked and monitored on a monthly basis.
c. Establish a monthly meeting to review all financials and help direct future efforts in order to stay on track with 30% revenue goals.
d. After determining where the majority revenue comes from, create a marketing/PR plan to hone in on strengths and/or improve weaknesses.
4) STEP FOUR: Now it’s KPI time! You have established a vision, some large goals/objectives, and set up tasks for each of your goals so now it’s a matter of deciding on KPIs and setting yourself up to measure them on a regular basis. Similar to the last two steps, you’re really just deciding on a few KPIs for each goal to measure and to create a space to review this information easily on an ongoing basis.
Here are some examples of KPIs specific to the revenue goal:
a. Top line revenue month-over-month and year-to year (ex. measuring revenue January against February and March, and so on as well as January to previous year January)
b. New customer acquisitions month-over-month and year-to-year (this indirectly translates to revenue growth)
c. Percentage of revenue growth from all sources month-over-month and year-to-year (this can help determine if marketing efforts in certain areas is working and where to shift, when needed)
5) STEP FIVE: Now you have all the pieces you need in order to establish and measure KPIs and the last thing you need to do is setting a day/time every single month to review and measure/track these. This is probably one of the most challenging steps because it’s often easier to sit down and just mark a one-time thing (like establishing KPIs) off your list but it’s harder creating a habit and consistency to see these things through. It’s also important to remember that even if you don’t meet exactly every goal or task you set for yourself, it’s important to try to regroup and still keep measuring and adjusting. Owning and growing a business is a slow process that takes analysis, reflection, adjustment, failure, and trying thing after thing until you’re successful.
I would recommend setting up a time during the week of each month (usually the beginning or end) to review everything. You should allow yourself plenty of time (at least a few hours) and if you have a partner or employees, you may want to consider including those individuals in the meeting with you. Additionally, there should be a centralized place you keep the data that is easy to understand and easy to keep updated so you can easily measure this without it taking hours and hours to set up before you can even view and understand the results.
Lastly, you may want to make this meeting a “special” meeting that isn’t like the rest of your business meetings. For example, maybe you get out of the office and have a working lunch for 2-3 hours to review all of this. I personally find it inspiring and motivating to switch up your environment every so often and particularly when creative thinking is needed. A coffee shop or some other creative space may also be conducive.
While this isn’t completely exhaustive of all the things you should do when establishing KPIs (and it certainly does simplify the ease of this because believe me…this isn’t easy!) it does give you a starting point to get set up for success. The timing couldn’t be better because it’s the start of a new year and while it is cliché, it’s cliché for a reason; people love a new start at the beginning of a new year. Good luck!