Over the next few months, we will be going deep into the top 5 KPIs that your business should be tracking to make sure you are on the right path to success. But before we get into the nitty-gritty details of which KPIs you should be paying attention to, we need to cover the basics: what are KPIs and how do you choose effective ones?
If you’re already a KPI wizard feel free to skip to section two, but if you’re anything like a good number of the business owners we sit down with, you may need a brush-up on what makes a good KPI and why you should pay closer attention to them.
WHAT ARE KPIs?
KPIs, or Key Performance Indicators, are the beating heart of your business. They are the quantifiable measurements of your business’ performance across a range of sectors that can be used to give you a clear indication of whether or not your business is meeting its goals. In layman’s terms, they are the things you track to understand if you are succeeding as a business or not.
THE STRATEGIC VALUE OF KPIS
When used effectively, KPIs can be used to define your business’ priorities, determine what success means to you, and give your team a clear set of goals for reaching their targets. They tell any member of your organization at a glance what’s working and where the business needs to improve. If your KPIs aren’t able to do that, then you might want to consider changing them to ones that are more effective.
WHAT MAKES AN EFFECTIVE KPI?
Effective KPIs have a few characteristics in common (you may recognize this acronym):
- SPECIFIC – Effective KPIs are specific, simple, and easy to understand. Everyone within the business should know how a KPI is calculated—it must be one metric that can be benchmarked and measured over time. For example, a sales-driven business may monitor the performance of their team by choosing to track the number of new leads generated every quarter.
- MEASURABLE – A useful KPI should be easily measured to track its performance over time. For example, a business wishing to use customer satisfaction as a KPI can track what percentage of their orders are from repeat customers.
- ACCOUNTABLE – Sometimes you will see this written as “Attainable”, but we feel that having goals with defined accountabilities are equally as important. Make sure that each KPI has someone listed as accountable for making it happen. If you don’t, it will get overlooked when people get busy doing other things that they are being measured against.
- REALISTIC – For a KPI to be a valuable tool in guiding the business and informing decision making, it must be realistic. Staff must be able to take action to influence the KPI for the benefit of the company. If you are looking to grow your book of business, consider setting a KPI for what your team can actually achieve, not something far beyond their reach.
- TIME-BASED – For any KPI to be truly useful, you need to attach a schedule to it. Do you need to reach X number of new products made per quarter? Per year? By adding a time frame to your KPIs you will know exactly how far you are ahead of, or behind, schedule on a daily basis.
THE KEY KPIs YOUR BUSINESS SHOULD BE TRACKING
The first KPI that we want to highlight is one that we find many of our clients forget to track—Net Profit Margin. Net Profit Margin, or Net Margin, is a simple calculation that demonstrates how effective your business is at generating a profit against every dollar of revenue that you bring in. It is expressed in this simple formula:
Net Profit Margin = Net Income / Sales
Why is this important? By tracking the increases and decreases in net profit margin, you can better assess whether your current practices are working, and better forecast your annual profit. Let’s look at an example:
As a business owner, Doug can easily take a look at his monthly income statement and see that his Net Profit Margin for January was 44.6% but dropped to 30.0% in February due to an increase in Materials costs. This information allows Doug to decide whether he needs to address the issue with his material costs or see if he can make up the difference elsewhere, such as with a push to bring in more sales.
CHOOSING THE RIGHT KPIS FOR YOUR BUSINESS
Businesses are like people—no two are the same. It’s crucial for you to choose KPIs that are the best reflection of your organization’s short-term targets, long-term ambitions, and the way your business operates.
If you’re not sure about how to build out your KPIs, our consulting team is always available to help assess your business, identify achievable long-term goals, and help you chose the most effective KPIs to ensure the success of your business.
To discover more about how KPIs can help your business, contact us at 604-534-7701 or email us at firstname.lastname@example.org.