What are KPIs and why are they important for business success?
As a small business owner, you likely measure the success of your business largely in financial terms. In the very early stages, that may be as simple as checking the balance in the checkbook. For most businesses, the main tool is the P&L or Income Statement in tandem with the Balance Sheet and sometimes the Statement of Cash Flows. Accounting systems like QuickBooks also provide additional reports on elements such as Accounts Payable, Accounts Receivable, Inventory and Cost of Goods Sold; or ratios such as Return on Investment or Return on Equity.
Although financial outcomes are obviously critical, they are only a top level result of many processes within the company. In order to more fully understand how well your business is operating, and more importantly, to determine how to improve performance, it is necessary to establish non-financial Key Performance Indicators (KPIs) to measure critical areas that could negatively affect the business’ overall performance.
Here are some examples of potential Key Performance Indicators:
- Website visits
- Open and click-through rates for email marketing
- Leads generated by source (website, social media platforms)
- Monthly sales calls
- Lead response time
- Opportunity-to-win ratio
- Overall satisfaction or satisfaction improvement
- Complaint resolution
- Inactive customers
- On time delivery
- Manufacturing cycle time
- Rework or scrap
- Shipping claims
- Initial quality acceptance/customer returns
- Long-term reliability
- Warranty claims
- Employee engagement/satisfaction
- Turnover rates
- Training cost per employee
Inspect What You Expect
Once you identify which KPIs to utilize, establishing a process by which to measure these KPIs against goals of your business should come next. In order to get the most value from Key Performance Indicators, follow these six guidelines:
- KPIs should flow from and support the overall business strategy or plan.
- Although there are some common measures that many companies use, KPIs should be customized to align with organizational objectives such as to increase market share, improve customer retention or reduce the cost of poor quality.
- Select a few critical indicators that are the most influential drivers of performance, and make sure that data collection can be done easily and consistently.
- Establish baselines and goals, and implement a regular review process to identify any gaps in performance. Compare against competitors or benchmarks when possible.
- Assign owners or champions who are charged with taking corrective action when results are not in line with expectations.
- Communicate and share the results to engage the efforts of everyone to stay focused on desired outcomes.
As a result, you will have a clearer indication, both financially and operationally, how well your business is performing.
While it may seem like a lot of work to establish and manage KPIs, it is an effort that pays handsome dividends by making business performance and financial results more predictable and sustainable. If you need help in setting up your KPI system, contact the Business Mentor Team today.
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