Choosing key performance indicators (KPIs) that align with your financial objectives will help you meet them
“If you can’t measure it, you can’t improve it.”
This famous quote by Peter Drucker, who was described by Businessweek magazine as “the man who invented management,” is so effective because of its simplicity.
The success of your business will likely depend on many key performance indicators (KPIs). Loosely defined, a KPI is any quantifiable measure a company uses to gauge its success against established goals. Financial KPIs, for example, measure a company’s progress in generating revenue, containing costs, and maintaining profitability.
Knowing how to track and respond to these measures and set appropriate goals can be challenging. Thankfully, Drucker and his contemporaries have created a wealth of material to guide you.
Another challenge lies in interpreting all the research and conventional business advice concerning KPIs. There are many opinions about the number of metrics SMB owners should be tracking. A Google search will yield articles claiming 136, or 64; others narrow it down to 18. It seems that many business management theorists agree that the magic number is seven.
Key performance indicators
You should select which KPIs your business will monitor the same way you answered other difficult questions when starting your business: by simplifying your thinking around a few key points. What everyone else is measuring is far less important than your specific goals for the business, the financial realities of your industry and market, and how you define success.
Like the rules governing compliance, the guidelines for setting appropriate KPIs depend on the type of business you conduct, and the industry in which you operate.
For example, if you run an online-only business, you will need to track the conversion rate of visitors to your website rather than shrinkage or sales per square foot. If you lead a consulting business, KPIs concerning product inventory will be irrelevant, but you will need to track costs associated with associate productivity, such as software.
As your business grows, you will need to reevaluate what you are measuring and how those metrics are helping to guide your business strategy and adjust your KPIs accordingly.
The “magic 7” financial KPIs
In a field where there can be as many well-reasoned opinions as there are strategists, there is some agreement that these are the most critical financial metrics for business owners to track, and a key question to ask for each:
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Revenue growth rate: Are you increasing sales?
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Net profit: Are you generating enough revenue to cover costs?
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Net profit margin: How much profit are you generating for every dollar you make in sales?
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Gross profit margin: How much of your revenue covers the cost of producing your goods?
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Operating profit margin: What proportion of your revenue is left after costs?
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Return on investment (ROI): Are you investing money in the business wisely?
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Cash conversion cycle: How liquid is your company?
Beyond these KPIs, another important financial metric is relative market share. You should always be aware of how your company is faring in the marketplace relative to its competition. Knowing your competitors’ positions will allow you to target your local, national, and global marketing efforts where they are most needed and will inform business decisions about investment and operations.
There are many other KPIs that fall under the umbrella of financial measurements and may be harder to quantify but are no less important to the success of your company. Customer retention and loyalty are “softer” metrics that require more sophisticated means of measuring such as surveys and detailed data mining. These obstacles often prevent many young companies from tracking customer-centric KPIs, but customer retention is a prime driver of profitability.
Part of a SMART business strategy
To Drucker’s point, you must measure it before you can hope to improve it. First, though, you must determine what “it” is.
In business, the acronym “SMART” is a popular way to define business objectives. You are probably familiar with what it means: goals must be Specific, Measurable, Achievable, Realistic, and Timely. Using this framework is helpful when starting a business and checking its progress as it grows. Your choice of KPIs will address the “Measurable” part of the acronym.
For example, one of your goals for your new business may be to reach a specific dollar figure in sales within one year. You should keep a close eye on your company’s revenue growth rate, monitoring it weekly against the target number you established.
SMART goals should remain flexible. If you find that your business’s circumstances have changed, as most businesses have recently, you will need to adjust those goals accordingly.
We know what counts
When you need an objective opinion about what metrics you should be tracking, look to the accounting professionals at Franco Blueprint. We provide peace of mind for small business owners by reducing financial risk, increasing cash flow, and ultimately, allowing them to focus on growing and managing their business.
Whether you are just beginning to plan or are reevaluating your progress, Franco Blueprint is available to help you with your small business concerns. Reach out for a free consultation with one of our experts today.