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The old thermometer on the porch was the only way to find out the weather outside before we could check it on our phones or TVs. You can choose the best clothes for you by knowing how hot or cold it is. Key Performance Indicators are similar in that they measure an element of a company. They also measure the success of an organization and let them know which specific activities they need to improve. They answer the question, ‘Are our business goals being met?’
Choosing the right KPIs for your business is not a simple formula. Priorities are different for every organization. What may work for one organization might be irrelevant to another. KPI priorities vary even across various divisions within a company. Finance is more concerned about how everything impacts the bottom line. The sales department has a single goal: sell, buy, sell. KPIs are used to help achieve individual targets.
Why use KPIs
KPIs are the GPS of a company. This data-driven construct lets you know when a roadblock is ahead or if you need to take a different route. They track the progress of an organization and report to managers and stakeholders.
KPIs enable business owners and managers in a highly competitive market to make quick decisions. This is a great way to stay on top of the game and influence the market before you are affected.
Employee morale is also improved when goals are clearly defined. Employees can easily understand them. It is what makes people ‘buy in.’
How to set good KPIs
You want to tick off some boxes when setting KPIs. Here are some traits you should be aware of:
Unaffected By Extraneous Circumstances- well-defined KPIs won’t be affected by factors outside the company’s control.
Quantitative- They have numerical values. (i.e., We sold 100 units this month.
Derived From Data- These are based on company data that helps define goals. (e.g., the new product upgrade increased sales, which brought our marketing costs to close to 20%).
Directional — Much like a temperature, they tell you if the situation is going in a positive direction or a negative one. (i.e., our customer base increased each of the past three years).
Applicable To The Nature Of Your Business- They are tailored to your business model and industry. A common mistake is to try to use cookie-cutter KPIs.
Your Entire Company – Every employee who impacts a KPI understands the importance of that KPI.
Inspires Decision Making- They show you which processes work and which do not; they tell you what to improve or change.
KPIs are a concise way to communicate with the company. This allows everyone to understand the goals and work towards them.
Examples of KPIs
When setting KPIs, it’s essential to remember that they should be tailored to your needs. Your performance goals must be tailored to your specific company.
Although this is an obvious KPI, it falls into the KPI category. A high-profit margin is a sign that you are on the right track. Gross and net incomes can break down profit KPIs.
COG – By analyzing production costs, you can define markups. Profit margins can be protected by identifying fluctuations and anomalies.
Assets and Liabilities – Knowing your monthly liabilities and how they balance against your assets and current state will help departments create intuitive budgets.
Forecast vs. Revenue – A good financial analyst, or even an accountant, should be able to forecast your revenue using historical data. These numbers are not always exact. But that’s okay. Analyzing the difference between your forecasted and actual revenue will give you valuable insights.
DSO (Days Sales Outstanding) DSO is the number of days that it takes on average to receive your payment after a sale. The formula is as follows:
DSO = Accounts receivable / Total Sales Value x the Number of Days Measured.
It would be best if you aimed to collect payments as quickly as possible to maintain a high cash flow and smooth operations. Most companies monitor this monthly.
CPA – CPA, or Cost Per Acquisition, is the most common measure used to assess the effectiveness of research, marketing, and accessibility. It’s a valuable tool that tells you the average cost of gaining a customer. This will help your business convert more leads into paying customers.
Customer Lifetime Value () is the metric cousin to CAC and is often used together. This KPI helps you identify which avenues lead to high-quality customers. You want to attract customers that will be loyal and give you more value in the long run than one-time buyers.
Customer Churn Ratio – High churn rates are not good. This is the percentage that customers don’t return to make another purchase or cancel their service. Measuring negative values, such as churn rates, can provide powerful insights into improving customer loyalty.
Total Number of Customers This may seem like an obvious KPI, but it is important to analyze the peaks and valleys in total customer numbers.
Customer satisfaction – This one is important. You can analyze customer satisfaction in a variety of ways depending on the setup of your business. Customer retention after initial purchase, average customer reviews, survey results, and referrals are just a few examples.
NPS (Net Promoter score) This goes a step further in demonstrating the relationship between long-term revenue growth and customer satisfaction. You can collect customer data via emails, reviews, and surveys to determine potential referrals.
Here is a typical NPS structure. On a scale from 0 to 10, how likely are you that you will be referred to a friend by you? Customers who answer with a score of 9 to 10 will be considered “promoters,” 7 to 8 “passive,” and less than 6 are detractors. NPS is calculated as the difference between the percentages of Detractors and Promoters.
Customer Services – It is difficult to build a perfect customer service model. This process is built over time through feedback, trial, and error. These KPIs can be used to build industry-leading customer service. An example of this is to analyze support ticket numbers.
Turnover Measuring employee turnover quarterly can improve morale and positively impact the entire business.
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