Know your numbers. It’s the best single piece of advice I have for small business owners, but as the saying goes, “easier said than done.” It’s not always clear which numbers (or metrics) you need to know, nor is it clear how to apply them in the context of a strategic objective or measurement. Let’s talk about how to create KPIs that are actionable and meaningful.
Everyone is talking about them, but no one is implementing them: Key Performance Indicators (KPIs). So, what exactly are they for, and how can small businesses create KPIs with limited resources?
Today, I’m going to break down the explanation into common questions:
- What are KPIs?
- How do you create a basic KPI?
- Are there step-by-step guidelines for KPIs?
- Which KPIs should I create based on my industry?
What are KPIs?
In the broadest sense, KPIs are metrics that businesses track and analyze to understand performance and meet actionable goals.
Commonly used KPIs include financial, customer service, process, sales, and marketing metrics. Typically, KPIs measure the progress of organizational performance against clear objectives.
KPIs provide a framework for improvement, so start small.
Creating KPIs should be a manageable task for your business. In other words, don’t be overly ambitious. How and why you select certain metrics should be relevant to your business. Improvement can be measured against internal targets, industry peers, or both.
Start with what you know because you can always adjust or eliminate KPIs that are no longer useful. Rigid KPIs lead to a path of stagnation and false confidence.¹
How to create KPIs for your small business
- Start with a broad objective.
- Identify “key” indicators that contribute to that objective.
- Identify a metric that matches your objective and a period for measuring it.
- Monitor your KPIs to ensure you’re meeting your goals.
- Modify your KPIs if they aren’t giving you actionable information or if your goals change.
Start with one objective and build KPIs from information you can access now.
Start with two to three KPIs and one objective. Let’s say we’re looking to gain loyal customers or simply increase revenue as efficiently as possible. Our industry is consumer-packaged goods, and we’re 100% e-commerce.
You start with an objective: increase customer lifetime value.
Now, we can look at some metrics.¹
- Average order value over time
- One-time conversions vs. subscriptions
- The percentage of repeat customers
I’m a CPA, not an e-commerce guru. So, I’m talking about KPIs in an industry that I have no substantive experience in. The point is that I started. If you want to know how to create KPIs, know this: “Knowing” is overrated; doing is what counts.
If you want to create KPIs, move first and refine them later.
“There are many businesses that routinely measure various KPIs, but I can prove they don’t alter, increase, and control the calculation and never have key performance metrics,” says researcher David Pamenter, referring to KPIs in corporate settings.²
Fortunately, you do not need to impress upper management with hollow KPIs because you own your business and future.
Researchers go on to list two points that I find especially interesting.
- “The less KPI, the better.”
- “Every KPI must have a simple and straightforward definition.”²
A good place to start is with one KPI for one department. I recommend starting with sales because the data set is manageable. Financial KPIs will include financial data and look at profitability and risk vs. return. Call me to get started with those.
Set up a KPI dashboard for a visual guide.
A KPI dashboard is a tool for visualizing your data in a way that is easy to understand. Think charts and graphs that can be read at a glance.
When we talk about how to create KPIs, software platforms need to be a part of the conversation. Get the data and the processes, then look for opportunities to automate. We want you to perform at enterprise levels without enterprise-level redundancy.³
Follow these six guidelines for solid KPIs.
1. Provide objective, measurable evidence of progress.
Choose KPIs that can be accurately and consistently measured. If you go with a KPI like “Improve the brand’s reputation,” and it’s not possible to identify that with any objective data, move on. Stick with measurable information that your leadership team can understand and act on.⁴
And remember, you don’t need to get fancy. I’ll get into some examples down below, but for now, just know that your KPIs shouldn’t involve a complex formula.
2. Be actionable.
A good KPI measures data that’s directly within your business’s control.
Sometimes, businesses will use an indicator like “market share” as a KPI, but that’s partly outside your control. Instead, choose an actionable KPI that’s impacted by your business and your business alone. So, you’d instead want to go with a figure more like “sales from existing customers.”
3. Identify relevant KPIs.
Based on your business objectives, choose metrics that accurately reflect your success in different areas like sales, customer satisfaction, operational efficiency, and financial performance.⁵
4. Set targets for each KPI.
Establish realistic and achievable targets for each KPI, considering industry benchmarks and past performance.
5. Add “change-over-time” to your KPI process.
A KPI needs a time component so you can see your progress over time rather than just a snapshot of the present.
By tracking change over time, you can spot shifts in the market or your business as they happen and adjust your strategy accordingly.
6. Strike a balance between leading and lagging indicators.
Leading indicators are metrics that help you anticipate future performance; lagging indicators measure what’s already happened. Lagging indicators reveal short-term progress but should be used with caution. Overambitious predictions of future performance lead nowhere.²
A KPI can be either lagging or leading. Start with lagging. If your organization has the resources, data, and will to develop both, do it.
Let’s circle back to client value and start revenue per client (RPC).
Revenue per client (RPC) is one of the simplest and relevant KPIs to track. Simple isn’t a bad thing, though; RPC gives you quality, actionable information.
To figure out your revenue per client, divide your annual revenue by the number of clients you have. So, if your business generated $500,000 last year, and you had 500 clients, your revenue per client is $1,000.
Select objectives that are relevant to every business first and your industry second.
Every business is going to want to measure and compare performance for the following items:
- Revenue growth
- Profit margin
- Client retention rate
The reason is pretty simple. These are fundamentals. In fact, I believe I’ve repeated myself on “client retention” at least three times in this article. Yes, we want to keep the clients we have and grow their accounts.
If your business produces or builds, KPIs should be a priority.
When we deal with materials, we enter a completely different world than professional services. You have finite resources, and you need to know if those resources are being utilized efficiently. You will be leveraged, and that will never change.
Identify, describe, and target waste. Take a look at production efficiency or acquisition cost. Consider inventory turnover or workforce productivity; these are all excellent candidates for KPIs.
Stale KPIs are worse than no KPIs.
Remember that time marches on, and changes outside the office mean changes are needed inside the office. If you select a metric or set of metrics and create a KPI, the work is not over. You should adjust for changes once a quarter.
That’s how I do it. So far, it’s working.
Get started on a growth plan.
We’re the best firm in the metroplex for businesses that are growing fast and want to get squared away on performance, tax, and accounting.
Schedule a discovery call, and we’ll work through what you need now, including KPIs.
Talk soon,
Jeremy A. Johnson
References
- PWC. Guide to Key Performance Indicators Communicating the Measures That Matter [Internet]. 2007 [cited 2024 Oct 28]. Available from: https://www.pwc.com/gx/en/audit-services/corporate-reporting/assets/pdfs/uk_kpi_guide.pdf
- Srinivasarao M, Narayana Reddy T, Giri Babu N. Small and Medium Sized Enterprises Key Performance Indicators. IOSR Journal of Economics and Finance [Internet]. 2020 [cited 2021 Dec 7];11:PP. Available from: https://www.iosrjournals.org/iosr-jef/papers/Vol11-Issue4/Series-6/A1104060106.pdf
- 6 KPI Charts to Drive Performance & Profitability in Small Businesses [Internet]. [cited 2024 Oct 29]. Available from: https://www.growthforce.com/hubfs/6%20KPI%20Charts%20to%20Drive%20Performance%20&%20Profitability%20in%20Small%20Businesses.pdf
- Measuring Success: How to Optimize Performance with Key Small Business Metrics [Internet]. SCORE. 2021 [cited 2024 Oct 29]. Available from: score.org
- Manage Key Performance Indicators (KPIs) [Internet]. Ge.com. 2023 [cited 2024 Oct 29]. Available from: https://www.ge.com/digital/documentation/apm-classic/v467/help/metrics-scorecards-manage-kpi.html