What is a KPI?
As a small business owner, KPI is an acronym that you’ll want to familiarize yourself with because chances are you’ll want to use them to track your everyday business performance.
Most KPIs use a combination of visual data to represent progress. This can include a mix of charts, graphs, and additional information.
This article will break down what a KPI is, what it’s used for, and why using them is crucial to help work on your business goals.
Key Performance Indicators, also known as KPIs, are a quantifiable measurement that tracks a company’s overall long-term or short-term performance.
There are many different kinds of key performance indicators, but the majority of them typically focus on revenue and profit margins.
A few of the most commonly recognized key performance indicators are:
Net profits: the leftover profit within a company once all of the taxes, expenses, and interest payments for that same period are taken care of.
Gross profit margin: the remaining revenue after any accounting-related expenses associated with the production of goods for sale within the company is accounted for.
Working capital: money that flows from a loan source (your bank, or investors) that is used to fund the daily activities of the business.
Income sources: Where are your revenue streams stemming from? Analyzing your revenue per client and per service is a great way to track the most profitable path for your business.
What makes an effective KPI?
The objective of any key performance indicator is to streamline business operations.
An effective KPI should start with a clear and straightforward objective. When done correctly, rather than a typical brainstorming strategy, key performance indicators have the ability to impact and drastically improve operations within the company directly.
How to formulate effective KPIs
Writing an effective KPI can be done in the following steps:
- Describe your intended results: What is your strategic objective? What goals are you working towards?
- Consider alternative routes: How do you intend to measure results, and can you arrive at these intended results in more than one way? If yes, consider all of the possibilities and narrow down which one will be the most effective for your business.
- Choose the right measurement (based on objective): Select a KPI that will best reveal how your business’s performance is improving, worsening, or staying the same.
- Create an index: Several similar measures can be grouped to help better analyze data. For example, if you measure consumer emotions, like client satisfaction or loyalty.
- Set genuine targets: Create attainable goals that are actually achievable based on the data at hand, as opposed to striving for unrealistic achievements that are impossible or highly unlikely to be met for a specific reporting period.
How to share your KPI with stakeholders
KPIs allow an organization to engage with stakeholders in a meaningful way because they allow the company to present real results. A KPI is a measurable record of your business’s performance.
When presenting key performance indicators to stakeholders, it’s important to remember the following:
- Make sure all of the data is as up-to-date as possible. You want this to be an accurate depiction of your company’s performance for a given point in time.
- Present your findings in an engaging way. Nobody likes to read a long wall of text, especially when data is involved! Consider using graphics, charts, and bright colours to captivate interest and engagement from potential investors.
- Consider a communication plan: rather than feed your stakeholders a massive update all at once, consider rolling out the KPIs as part of a larger communication plan. Sharing a strategy in advance could lead your stakeholders to be more receptive to any changes you’re proposing.
Why weekly/monthly KPI reviews matter
Most key performance indicators are reported on a weekly or monthly basis.
KPI review meetings should be done with producing real-time results in mind—not just for the sake of sharing more numbers and data crunching.
As numbers change all the time, especially in business, most companies opt to do a weekly or a monthly KPI review, or sometimes both. Weekly KPI reports are good for keeping track of results indicators, which cover things that have already happened. On the other hand, monthly KPIs can allow you to set more long-term business objectives that can be reported on at the end of the month.
By doing both weekly and monthly reviews, you can better keep track of how your company is performing on a monthly basis, based on the performance delivered every week.
The importance of actionable KPIs
Actionable KPIs are critical to making meaningful progress towards the objectives of your business.
Creating actionable KPIs starts with deciding which metrics are worth measuring. Once that’s been determined, you’ll need to determine the chosen result, understand why it matters to your business, and deploy a strategy that meets the objectives outlined by your organization.
Achieving actionable KPIs can be further attained through illustrating a specific outcome, measuring your advancement towards the goal, making sure those goals are attainable, making sure that goal is relevant, and creating a timeframe to bring the strategy to the surface.
Advancing and updating KPIs to fit evolving business needs
As the objectives and business metrics of your company change, the KPIs you create must also change.
For example, if you set up monthly KPI reviews for your business, and the needs of the business change before the review deadline it simply doesn’t make sense to carry on with the original key performance indicator. Make sure your KPIs remain up to date in order to best meet the strategic goals of your company.
Making sure your KPI is attainable
Setting attainable key performance indicators is crucial to planning and advancing the sales targets within your company.
After you set a goal, ensure that you follow through with a strategic communications plan that allows you to measure results in real-time from start to finish. If necessary, involve all relevant stakeholders so that everyone is on the same page and is privy to the target and end results.
Unattainable KPIs can also lead to serious employee burnout, which can negatively affect employee performance and affect the organization as a whole. Before setting new KPI targets, always ensure that everybody in the company understands the decision-making process and the overall business objectives for that reporting period.
Using KPIs as part of your performance management frameworks
Step 1: Aligning your business strategy
How does your current business model reflect the goals that you have in mind?
Do the projected KPIs fit the current strategy of your organization?
Aligning the strategy of your business with the right KPIs means that the two directly relate to each other in one way or another. The coexisting relationship between the two allows everybody within the organization to see and understand where and why their contributions matter. Before you do anything else, ensure your KPIs showcase action-oriented goals that reflect the current needs and the company’s goals.
Step 2: Covering all of your bases
When creating attainable key performance indicators, you need to make sure all of your bases are covered. This includes:
- Calculating your revenue growth
- Analyzing your revenue streams: where is the majority of your business income stemming from?
- Revenue concentration: ensure you have a diverse enough client portfolio to protect your net profit margin in case one client severs business ties.
- Keep track of your expenses: keep an eye out for unnecessary or unprofitable expenditures.
Step 3: Put your BSC strategy framework into action with OKRs
Some companies integrate what’s known as a Balanced Scorecard (BSC) into their KPI strategies. BSC’s are used to measure performance and provide feedback to organizations.
OKRs, also known as Objectives and Key Results, is another performance metric used to set and track goals. Combined with a BSC, your organization can analyze more specific measurements to get closer to your company’s business goals.
Step 4: Monitor with a KPI dashboard
A KPI dashboard is essentially one big collection of all of your KPIs, presented in an organized format.
Similar to how your car has a dashboard full of functioning systems, your KPI dashboard can help you figure out the day-to-day processes to ensure everything is running as it should be. Closely monitoring your KPI dashboard allows you to make minor changes as needed before problems develop.
Determining the best KPIs for your business
Every business is different, and therefore, has unique reporting needs. Determining which KPIs will work best for your business starts with having a clear understanding of your business’s current needs and business performance goals and objectives.
Following these steps should help you narrow down which KPIs you can use to help grow your business:
- Choose key performance indicators that directly relate to your business, whether that’s increasing sales or boosting customer service;
- Narrow down your key metrics: don’t try and focus on too much data to the point that tracking and reporting becomes overly complicated and confusing;
- Identify your business’s growth stage to determine what analytics matter most;
- Flag any performance indicators that are doing very well, as well as those that are doing poorly: this allows you to compare their differences and plan ahead for future reporting.
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