One of the most common reasons so many small and medium-size businesses struggle is that they don”™t know their KPIs ”“ key business indicators. These are the measurements that show how your business is doing.
Establishing and using KPIs can help you take control of your business and vastly increase your chances of success. Different businesses may require more or less emphasis on various KPIs, but the following work for most business.
Key business indicators are separated into two groups ”“ financial and nonfinancial. To get a handle on some of the financial KPIs you may need the help of a CPA and/or an experienced bookkeeper.
Financial KPIs
At the top of the list should be your business”™s profit and loss statement. Month-to-month comparisons will show you which months yield the highest revenues. Why are they the most lucrative? What can you do to change your business”™s paradigm to boost revenues in the leaner months while increasing the better ones as well?
You should have year-to-year figures for at least five years to show the stability and longer-term direction of your business.
Review your financial results monthly, quarterly and annually to compare with the financial goals in your business plan. If you expect to generate $500,000 in revenue and your P&L shows that you generate $350,000 during seven of the 12 months, what”™s happening in the other five? If you can”™t get those five up to the other seven, you”™re going to work like mad during those seven months to grow your business by another $150,000.
Look at the numbers at least monthly so you can see what you have to do to make up for bad months and to capitalize on good months.
How many customers at what price point do you need to hit your financial targets? How many sales do you anticipate having per customer over the course of a week, month or year? What is your prospect-to-customer conversion rate ”“ how many leads must you get daily, weekly, monthly, quarterly, yearly in order to achieve your financial targets?
Analyze all vendors. How much is paid to each? When was the last time payment terms and/or contracts were renegotiated?
What is the cost of current marketing activities? A marketing program is successful only if it brings in enough revenue to cover its costs plus one. So if you are spending $10,000 on a direct-mail campaign and your average sale is $100 you need to bring in 101 customers to make that campaign a success.
Nonfinancial KPIs
Review employee performance appraisals against job descriptions. Are your employees doing what their job descriptions say they should be and are their efforts resulting in reaching your financials targets based on your plan?
Consider customer satisfaction on a monthly, quarterly or annual basis. You need to stay in touch with your customers but depending on the type of business you are in, satisfaction surveys may only make sense at certain times.
Rank clients A to D, where A is “raving fan” and D is “drop ASAP.”
A D is an existing customer that is gradually falling further down the measure scale and on the verge of being unprofitable. You are probably carrying some Ds that are about to get costly.
A C customer rarely buys from you, pays late and is generally a nuisance but you don”™t lose money.
A B customer buys more regularly, generally pays on time, but is never going to write you a recommendation or give you a referral. It”™s just not in their DNA, but they are the backbone of just about any business.
The As are a lot rarer, but you get great results from them, they always pay on time, they come back time and again, and they refer friends and family.
When it comes to your business, accurate, complete, timely information is the only thing that gives you the power to really run your business and not have it run you.
Josh Slavitt is a business strategies and certified business coach with Westport-based Next Level Strategies. Reach him at joshslavitt@actioncoachnow.net.
