How To Use Key Performance Indicators (KPIs)
To Grow Your Small Business
By Octavia Conner
I'm pretty sure you have heard the term Key Performance Indicators or KPIs before. But what are they, and why should they matter to you as a business owner?
Well, in this video and article, we are going to deep dive into KPI, and I will provide you two examples to help you develop the KPIs for your business.
One way to ensure that your business grows – is to focus on improving specific numbers. These numbers are known as your business's KPIs. But what does KPI mean?
K means Key - The specific numbers you will focus on will be the keys to helping your business grow.
P means Performance – You are going to track the performance of these key numbers.
I mean Indicator – What the numbers indicate will then help you identify what you need to do to improve the overall growth of your business.
Do you see how it all works together?
With this information, we can conclude that key performance indicators help businesses measure how successful the company is at achieving its objectives.
When determining your KPIs, you want to keep the number of key performance indicators that you track small, and you want to make that they are easy to track. You do not need 50 plus KPIs. I recommend no more than five critical numbers.
To determine your key performance indicators, I want you to ask yourself the following questions:
1. What is your desired business outcome?
What are the top three areas you desire to achieve the most in business? Is it to increase revenue, increase cash flow, maximize profits, increase customer satisfaction, or improve conversion rate? You must get crystal clear on what is worth tracking that will have an overall positive and profitable impact on your business success.
2. How can you measure that outcome?
When determining how you can measure the results, you have to identify the different areas of your business that will impact what you are measuring? For example, if you want to improve the company's marketing efforts, what small details should you monitor to achieve the desired objective. There could be small metrics that make up the big picture. You need to identify all of the metrics for it to be useful in aiding business growth. I will provide an example of this later in the article.
3 How often should you measure your KPIs?
I believe you should set up a simple but effective system that enables you to measure your KPIs at least monthly, if not weekly. Closely monitoring the key performance indicators of your small business will increase your chances of improving them faster and more effectively.
Identifying and monitoring key performance indicators should be an essential compact of your accounting system. As an outsourced accounting firm, we outline and consistently monitor the KPIs for our clients as part of our online accounting services.
4 What role does your team play in helping to improve your KPIs?
You need to determine what each position or department must do to improve the company's objectives. Your business should operate like a well-oiled machine; therefore, every task and team member should connect with the overall business objective positively and profitably.
Now that we have identified the four questions you should answer regarding KPIs, let's deep dive into the two examples.
Example One -
Let's say that you are a graphic designer, and your desired outcome is to generate more revenue. You know that for every 4 prospects you speak with at least 2 of them always convert to new clients. And let say that you desire to have 6 new clients per month.
We can safely determine that your top two KPIs are: 1) the number of prospects you speak with and 2) your closing conversion rate.
Armed with this information, we can conclude that you need to speak with 12 or more prospects per month and close at least 50% into new client agreements.
Now that you are aware of this, you need to determine where you would typically find most of your prospects. Or perhaps, you need to determine where your ideal clients are located in large numbers and market on that platform. If you have a marketing assistant, manager, or department, what must they do to increase this number? Should they focus on website traffic or content conversion?
As your virtual CFO, we would focus on your closing ratio and the average monthly earnings per sell. We would also focus on your most profitable service, product, and client to help you determine what you should market and to whom.
When hired as virtual CFO for consulting firms, we identify and track the top five key performance indicators that will maximize profits and cash flow quickly.
To achieve the overall goal of closing new clients, you must also focus on smaller metrics? All of the numbers above could be your key performance indicators tracked by you and your team.
Example Two -
Let's say that you are the CEO of a hair salon, and you have 3 stylists. Each stylist's average earnings are $60 per hairstyle. As the CEO, you desire to increase revenue by having each stylist earn at least $500 per day.
With this daily KPI revenue goal, we know that each stylist needs to complete at least 9 heads a day at $60 average cost per style. Therefore, your three KPIs are the number of heads completed per day, the average cost per style, and the desire total daily revenue earnings per stylist.
As your accountant, we would keep track of your total earnings per day and overall earnings per stylist. We also send daily, or weekly key performance indicator reports.
With this information, you, your team, and your accountant are all focused on growing your business.
Key Performance Indicators can be leverage to scale your company faster, smarter, and consistently. A part of your outsourced accounting services should include not only financial reports but customized key performance indicators that are tracked monthly, weekly, and depending on your financial position and desired goals, daily.