Key performance indicators measure how a company will grow. Here's what you need to know about KPIs as a small business executive or owner.
Performance and growth metrics are essential for any business. Small and mid-size companies must set clear business objectives and track performance to realize growth. Performance and progress indicators are different for each business.
Key Performance Indicators (KPIs) are a great way of keeping tabs on your progress. You have first to identify the right KPIs for your business, and that process starts with setting goals and objectives. Your KPIs have to be aligned with your business goals.
Read along and learn everything you need to learn concerning KPIs. We'll go into detail about what KPIs are, why they are important, how to select the right ones, and how to track and measure them.
What are KPIs?
Key Performance Indicators (KPIs) are those specific metrics that help establish how well or bad your business is doing.
As KPI.org puts it, KPIs are the "critical (key) indicators of progress toward" your business goals. In other words, KPIs tell you whether your business is achieving the growth objectives you've set. KPIs are numbers more often than not, and these numbers directly impact the performance of your business.
There are different types of KPIs, which include:
Input: These measure the type, quality, or amount of resources put into a production process. E.g. budgets
Process: These measure the quality, efficiency, or consistency of the production method used. E.g. cost of production
Output: These are indicators of how much work has been done and are the results of the production process. E.g. Daily production volume
As mentioned earlier, different businesses will have different KPIs depending on their operations.
Why is KPI Tracking So Important?
We've already established that KPIs are the most meaningful metrics in any business as they essentially help you measure business performance. That alone means that the importance of KPI tracking in any business should not be underestimated. Here's a closer look into why KPI tracking is so critical.
Helps you measure progress
As KPIs are tied to predetermined business outcomes, they help you determine whether your business is meeting those goals and objectives or not. For instance, your business objective is to increase annual revenue by 10%. Tracking KPIs like sales revenue and prospecting activity can help you determine whether you are on track to achieve your goal, even before the year ends.
Helps you monitor the business's overall health
KPIs are not only for measuring financial success; you can also set KPIs for different departments such as customer service, human resources, marketing, IT, and more. You can also set KPIs specific to your industry. This way, you can clearly understand how your business is performing overall across various departments.
Helps you identify red flags and issues
Analyzing your KPIs may help you uncover any hidden issues that might not get noticed otherwise. They can also help you notice patterns and trends, which help you predict what might happen in the future.
Can help determine goals and targets
Setting goals and targets is easy, but achieving them can be daunting. We tend to be over-ambitious when setting goals and targets. Only after our KPIs start generating some figures, we realize how realistic or unrealistic our goals and targets are. In this way, they can help you set more attainable targets and align them with the performance of your business.
How to Select the Right KPIs for Your Company
We've already established that KPIs are different for each business. That means there are factors to consider before accepting a specific performance indicator as critical for your business. It all boils down to your objectives, goals, and targets. You have to find the KPIs that best align with your business goals.
Here are some questions to ask yourself to ensure you select the right KPIs.
Are they aligned to your business goals? Your KPIs should be a reflection of your overall goals as a business.
Can they be measured? Good KPIs should be quantifiable and measurable – think ratios, percentages, or rates that can be tracked on a dashboard.
Are they attainable? KPIs should measure achievable goals instead of targets that are unrealistic.
Do they reflect your current state of business? KPIs should align with your company's lifecycle. For instance, a startup is likely to track different goals than a more established organization.
Understand Leading Vs. Lagging KPIs
All KPIs fall into these two categories – they are either leading or lagging. Leading KPIs are predictive, while lagging KPIs are demonstrative. Leading KPIs give you insights into what is likely to happen going forward. On the other hand, lagging KPIs demonstrate how much you've achieved your goals, targets, and objectives within a given duration.
Leading KPIs are result-oriented and indicate what an outcome will be in the future if you continue at the current rate. In this way, they help you optimize your business process continuously in a bid to ensure you achieve your objectives. They help you determine what steps you should take or what improvements you should make to achieve your goals.
Lagging KPIs are based on outputs and show you whether you have achieved your goal or target within the specific time frame. These are the KPIs most people are familiar with, for instance, revenue, profitability, conversion rates, etc.
You Should Track Both Lagging and Leading KPIs
Most businesses tend to only track lagging KPIs that measure business outcomes. This means that they can only tell whether they met their target or missed it. By also tracking leading KPIs, you can find ways to improve your performance continuously and ensure your business stays agile.
KPIs to Measure Agility & Process Optimization
Business environments, strategies, objectives, goals, targets, etc., change all the time, and it is helpful to be able to measure the adaptability of your business. Changes will come, and you need always to be prepared for it as a business. Here are two you can track:
Cash Availability: Cash availability PKIs are those metrics that tell you how much cash your business has access to. Limited cash availability makes it difficult for a business to adjust and adapt. It stifles growth and expansion as well.
Brand Affinity: Brand affinity is about how your customer's opinions, attitudes, and interactions with your brand. Brand affinity KPIs will help you gauge customer satisfaction and identify shifting brand perceptions. Customers are the heart and soul of any business. Brand affinity KPIs will help you understand what you need to do to keep them happy.
You can think about leading indicators are business drivers because they can help you figure out whether you are on track to reaching your goals or not. Some other examples of leading indicators can include total sales pipeline, average closing rate, and the number of presentations and appointments completed per month, for your sales department. If you're trying to track profit margins, you could keep an eye on how much of your sales come from your highest and lowest margins, etc.
If you're using lagging (outcome) KPIs without leading KPIs, you're getting only half the picture. These sets of metrics work best when tracked together.
Conclusion
Choosing and setting KPIs should be an integral part of setting up a business in the modern era. There are just too many moving parts today, even in small businesses, that you must find a convenient way of quickly establishing how healthy your business is. There isn't a way better than tracking the right KPIs.
The most important thing is to understand which metrics matter the most to your business. Business landscapes are never similar, even if you are running a business similar to another. You have to develop your own KPIs, to ensure you are monitoring your business the right way.
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