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Establishing and Tracking KPIs for a Small Business
The one commonality between all businesses, no matter the size, is their need to succeed.
However, without establishing and monitoring the key performance indicators (KPIs) of the business, it can be difficult to determine whether the business is succeeding or not. Additionally, the sooner the KPIs of a business are established, the better it is for the health of the business.
A few rules for selecting KPIs for a small business:
Select the important few
The task of tracking KPIs can become time consuming, and the small business owner needs to dedicate as much time as possible to improving the business rather than to administrative work. It is far better to track a few meaningful KPIs than a large number of trivial ones. In addition, too many KPIs just leads to confusion, and they may appear to start contradicting one another.
KPIs should match your company’s objectives
Whatever the key objectives of the business are, the KPIs selected should monitor how close the business is to achieving those objectives. Irrelevant KPIs simply waste time.
They should relate to every level of the organization
There is no point in measuring anything if the data that is being received is not valid. The measuring system should be repeatable and reproducible month on month without any problems. If new ways of measuring the KPIs are required each month, then there is a problem, and the data from one month cannot be compared to the data from the month before.
Balanced in long and short term
Measuring only the short term or long term success of a business is the sign of a short sighted business plan. It is the short term success that will build the long term success of the business. The KPIs need to measure both long and short term metrics to establish whether the business is actually succeeding or not at all goals.
Identifying the KPIs for a business
The first step in identifying KPIs for a business is to establish objectives for that business. The objectives will vary from business to business. However, a few common short term objectives could be things like:
- Increasing sales/income
- Faster production time
- Lower staff turnover
- Better customer service
The business KPIs will be based around these objectives. As such, it is important to decide long and short term objectives for the company. Typically, the long term objectives will build on the short term objectives. This does not mean that either category is more important than the other, a business needs to be able to survive in the cut throat realm of commercial endeavors.
The next task would be to identify which measurable areas of the business relate to the objectives chosen. Financial statements are an excellent source of KPI data. Any change in sales or income will appear in financial reports. Information relating to inventory or production may be traceable through the financial statements. Less objective KPIs such as customer satisfaction can be measured through the use of a survey or rating system filled out by each customer as part of the purchasing process. Things like staff turnover would be the realm of the human resources department.
Once the objectives and KPIs have been established, the data collection needs to begin. In instances such as production and sales or income related KPIs, the data will be on hand. In the case of those that are subjective and require the input from staff or customers, measuring tools will need to be put in place before any data can be gathered.
Common KPIs used by small business owners
Sales growth:
Most companies generate income by means of sales. This may be the sale of products or services. The sales growth metric would show the pace at which the sales revenue or income of the business is increasing or decreasing. Ideally, the sales growth of a business should be positive. In the case where a business is undergoing product research or some similar potential change, sales growth may taper off or even become negative. This would then be balanced by the KPIs, which measure the cause of the decrease in sales.
Product performance:
Knowledge of product performance can assist with establishing which products sell well and which do not. Analysing the aspects of those that sell well may help to boost the performance of those that do not do well. Alternatively, more focus can be placed on those products or services that perform well. Those products that do not do well can then be discontinued.
ROI:
Return on investment (ROI) is a vital KPI. All businesses invest money in some project or another – the most common investments being in assets and marketing. A good return on investment for an asset would show as an increase in income as a direct result of the use of the asset in question. A good return on investment in marketing would be evidence of increased brand awareness, as well as increased sales and income.
Debtor lifetime:
It is important for a business to be owed as little money as possible. Debtors interrupt the cash flow of a business, and allowing excessive credit has been the downfall of many a small business. Larger businesses have less of a problem as they will have additional income sources to carry the business while they wait for the money to come in. Naturally, the shorter the age analysis for debtors is, the better off the business is.
Creditor lifetime:
It is inevitable that a business will require credit from time to time. It is common practice for businesses that work together often to allow one another a line of credit or 30 day account. However, money owed to too many other businesses at once is dangerous. A business should strive to always have sufficient assets to cover the liabilities of their own business. If the debt equity ratio of the company is too high the company may be declared bankrupt.
Website related KPIs
In a world where most companies have a website, knowing if the website is contributing to the business is important. This knowledge can drive the decision to invest further in the online aspects of the business or not.
Traffic:
An examination of the number of visitors to the site, whether new or returning can yield vast amounts of information. If a business is new, the more new traffic to the site the better , as this indicates more exposure for the brand. An established business may want a higher percentage of returning traffic as this is an indication that customers keep coming back for more.
Lead or sale generation:
This particular KPI would indicate whether the website is contributing financially to the business in a more direct fashion. For an online store an increase in sales figures as well as an increase in spend per sale is a good indication that the site is doing well. A website that is geared towards getting potential clients in touch with the sales team, tracking the contact requests will give an indication of the number of leads the website generates.
Behavior flow:
Tracking the pages that are visited as well as the pages that cause visitors to leave a site can be helpful in determining if there is a problem on the website that needs addressing. A successful website would have a low bounce rate and visitors to the site would spend some time on the site and would likely visit a number of pages on the site. This is the profile of a website that is potentially benefiting the business it is serving.
It is important to establish a business’s objectives, KPIs and KPI measurement techniques early on in the lifetime of a business. Starting to track progress, or lack thereof, later on could be too late. The sooner a problem, or even a potential problem, is picked up the more likely it is that the problem can be solved.
You just have to listen.
When it comes to establishing objectives and KPIs, accountants and experienced managers can be extremely useful sources of information and insight into what their business may need. A successful business owner is one who listens to their staff and keeps tabs on how well the business is doing from the start rather than waiting for problems to become evident.
Written by Joseph Brady for Business2Community and legally licensed through the Matcha publisher network. Please direct all licensing questions to legal@getmatcha.com.
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