There is no way you can grow and manage a small business without understanding your KPIs, which are key performance indicators.
It doesn’t matter if you’re a startup, growing small business, or major enterprise – if you do not know what KPIs are correlated to the success of your company, I can guarantee that you will eventually mismanage your business.
Sure, you may have a good product, the best sales people, or cool marketing tricks, but as you grow, I promise you that you will eventually have to face the underlying facts in your business.
And if you do not understand those facts, or even track them, you’re going to dig yourself into failure.
Not only am I telling you this as a licensed CPA today, but I’m also telling you this from experience. I, too, made some mistakes in managing my first small business, a marketing agency, and their KPIs.
But as of today, that same small business pulled in over $10 million total in revenue over the last 3 years. We’ve made the Inc. 5000 list twice and we’re one of the fastest growing private companies in the US.
To be completely raw and transparent with you, it wasn’t until we figured out what was really driving the success of our business that we began to quickly grow. Once we did, we focused our attention solely to those things, applied intense pressure to it, and the rest is history.
In this post, I am going to give you some insight into what KPIs are, the importance of them, and the top KPIs to track for every business.
By the end of this post, you will be empowered to start understanding your business, inside and out, so that you can make decisions to reach your fullest potential.
To be clear, this post is for people who run businesses. If you’re looking for formulas and spreadsheets, this isn’t the place for you. This video is for small businesses who desire to quickly grow and scale their business through KPIs.
So if that’s you, let’s begin.
Let’s start with the basics.
What are Business KPIs?
KPIs, also known as key performance indicators, are quantifiable metrics used to evaluate the success of an organization.
I like to break down each word in the phrase to make sure you fully understand what they are – Key Performance Indicators.
Key – means that is a metric of paramount importance. Think of DJ Khaled, when he drops major gems he says, “Major Key, Major Key”.
Performance – means that the metric should be related to business performance. As the old saying goes, “if it doesn’t make money, it doesn’t make sense.” If you’re tracking vanity metrics that don’t drive revenue, you’re simply wasting time.
Indicator – means that the metric should indicate something, in this case, the health of your business. Your metrics should indicate how you’re performing, like – Are you growing? Are you profitable? Are you running out of cash?
Key performance indicators should tell a story. When Warren Buffet famously says, “accounting is the language of business”, this is what I believe he’s referring to.
By understanding your numbers, and I mean, REALLY understanding your numbers, you can make great decisions to grow your business.
This fact is exactly why Warren Buffet will be known as one of the most successful business owners and investors in the world. He understood how to assess business KPIs that led to him making superb investment decisions.
Why Are Business KPIs Important?
Key performance indicators are so important because they align your deepest business goals with your current reality. They tell the truth about your business and when assessed, it can propel you to make better decisions to reach your goal.
Let me give you a very simple example that illustrates this concept, that anyone can relate to.
Let’s say you want to lose weight. That would be your goal.
You know that in order to lose weight, there are some things that you need to do. Like, working out, eating healthy, and so on. You can use KPIs to see how you’re progressing towards your goal.
The simplest KPI may just be stepping on the scale and seeing if the number went down. Think of that KPI, as revenue or sales in your business.
However, stepping the scale doesn’t tell you the full story. It doesn’t tell you lost muscle and gained fat. Or if it was your new diet that worked, or your workout routine. Or, if you’re in better shape now today, than you were yesterday.
And that’s where the real KPIs come in – like analyzing your caloric intake, calories burned, body fat percentage, body mass index, and other metrics.
These KPI metrics tell you what’s really going on in your body.
And that same thing, is what success business owners do in their business.
They set strategic goals and identify the KPIs to track so that they can measure their progress. Then they sit down at a table, look at the numbers, and pull certain levers to adjust their results.
KPIs are how you accomplish big goals – whether it’s business or personal.
So, that’s what KPIs are. Now let’s talk about how you can start using this to reach your own goals.
How to Start Using KPIs
The very first thing you need to do is to determine your strategic goals. Regardless of how ambitious those goals are, set them.
Then, track the KPIs that are related to the success of your goals. Look at how you performed in the past across every critical area. Then, you can analyze those facts and make further data-based decisions.
The trick is identifying the KPIs that are most relevant to your business goals. And because there are hundreds of different KPIs you can track, it can be a little confusing.
I mean you can track your current ratio, accounts receivable turnover, inventory turnover, return of equity, return on assets, profit per employee, and…
I’ll stop there. Looking at words like these is exactly why people think accounting is too complicated and boring. I mean, I studied this for almost a decade and I can tell you, some of this stuff can even make me dizzy.
No, but all jokes aside, these terms are really just ugly words to answer questions like
- Are your customers paying you on time?
- Do you have enough cash in the bank to pay people?
- Do you have too much inventory on hand?
…and so on.
These are very important questions, and KPIs not only answer them, but it can help you make better decisions to improve your business. You really need to know this stuff to manage your business. And once you know it, you can rally your team around helping you hit these KPIs.
With that said, let’s discuss specific KPIs that every business needs to track at a minimum.
I should start by saying that there are many more KPIs to track than what I’m about to give you, because different things matter for every business.
For example, a restaurant may track average order size and how much food is spoiling. An eCommerce store might track website conversion rates or how much inventory they’re buying and not selling. A subscription-based business might focus on their average retention rate and lifetime value so on.
But, there are some KPIs that every business should track. So let’s quickly discuss those KPIs.
Most Common Business KPIs
But before I give them to you – I want to challenge you.
First, think of your business from the lens of your customers. How exactly do they interact with your business?
How do they find you? Why did they choose you? Are they happy with your product? Are they paying you? Can they rely on your business to stay around for the future?
The better you understand the answers to these questions, the better the decisions you can make to improve this and scale. KPIs can help provide you with the answers to your questions. So let’s dig into it.
I like to break the core KPIs every business should have into three categories – customer acquisition, liquidity, and profitability.
1. Customer Acquisition
If you don’t have customers, you don’t have a business. So it’s important that you understand what metrics drive your customer acquisition process.
The most important metrics you need to know is your customer lifetime value, return on ad spend, traffic and sales conversion rates across your advertising sources.
This will challenge you to get your customer acquisition process down to a science. Then, you can set targets across these metrics and strategize to hit them.
For example, in your company, you may look at:
- Your advertising spend
- Your resulting website or store traffic
- The percentage of that traffic that actually purchased something
- How much of that thing did they purchase and how frequently
- What channels did they come from
Looking at this will allow you to spend your money wisely to acquire customers to grow your business.
For example, you may spend $5,000 in advertising and generate a ton of traffic.
But if no one buys, it could mean that the advertising was not effective. Or, it could point at an issue on your website or with your product.
KPIs help you identify what to track and let you know if you’re doing good or not.
Like the old saying goes, numbers don’t lie.
By tracking your KPIs, you can be honest with yourself and proactively seek solutions to the problems that may be slowing your business growth.
Let’s move on.
Most businesses fail because they run out of cash. Period.
You could have a ton of customers and still have no cash in the bank.
For example, I have a construction client that has 7-figure sales on paper, but his customers aren’t paying his invoices on time. So as a result, he struggles to pay his employees and contractors.
In other cases, I’ve seen businesses with debt payments that are so high that they had to make a tough choice between paying back their lenders, or paying your employees.
These are problems that can be prevented by tracking liquidity-related KPIs, such as your working capital, accounts receivable turnover, and burn rate.
- Working capital is simply how much operating cash you have in the bank.
Most businesses try to have at least 3-6 months of expenses in operating cash. So if something comes up, like a recession, or sales going down suddenly, or maybe customers aren’t paying on time, it doesn’t put your business in a tight position.
- Accounts receivable turnover measures how quickly your customers are paying you. If people take months to pay your invoices, you’ll have a cash-flow problem. Or if you sell products and have a ton of chargebacks, you’ll also have a cash-flow problem.
Tracking your accounts receivable turnover helps you detect and correct these situations in your business. If you leave it unattended, you might find yourself wondering why your bank account doesn’t match your income statement.
- Your burn rate is simply how much cash are you burning each month. What are your monthly expenses, including debt payments?
Looking at your burn rate and working capital will make sure your business stays afloat.
You should have a budget and know how much money you spend each month on average. That way, you can make sure you have more than enough money in your bank account.
You can be great at both customer acquisition and managing liquidity, but if you’re not profitable, you’ll eventually dig yourself into a whole you cannot get a hold of.
The things to track here are your:
- And most importantly, profitability
Your profit margin should be a result of careful budgeting and expense management. It shouldn’t fluctuate too much and certainly never surprise you.
So these are the main KPIs that I urge you to keep track of in order to manage your business effectively. But, remember there are likely many more specific KPIs that relate to your business structure. So sit-down and think about what metrics correlate to the success of your business.
The last thing to address here – is how in the world do you track your business KPIs? Let’s dive into it.
How to Track KPIs
First of all, nothing is possible if you don’t keep track of it. Regardless of how simple, or tedious it is, you must track the things that are critical to the success of your business.
With that said, you can start by:
1. Do your bookkeeping on a monthly basis
You won’t be able to track any of your KPIs if your books aren’t done on a regular basis.
If you wait until tax time to do your bookkeeping, then I have to tell you, you’re not managing your business correctly.
Books aren’t done to simply comply with the government. That’s the last thing you need it for.
Books are done to provide the fundamental starting point for tracking your KPIs and managing your business. It’s where the greatest business minds like Warren Buffet start when analyzing businesses – financial statements.
Track your business revenue and expenses monthly. Then you can apply certain ratios to your financial statements that tell the story of how your business is performing – like the accounts receivable turnover or return on ad spend metrics we discussed previously.
2. Track nonfinancial KPIs
KPIs aren’t just found on your financial statements. It’s everywhere in your business.
For example metrics like:
- website traffic
- store traffic
- sales meetings
- conversion rates
- customer retention
- customer satisfaction
…and so on are not found on financial reports.
You have to compile this data yourself.
Now, ideally you’d have reports generated from tools that you may use that make this very easy. For example, a good CRM may automatically tell you your retention stats. Google Analytics will tell your website traffic. Customer surveys may tell you your customer satisfaction. And so on.
But even if they don’t – you need to roll-up your sleeves and do the dirty work to compile this information.
Because remember – once you have it and can sit-down and really look at what’s going on, you’re unable to make data-based decisions to grow your company, which is when the real business starts happening.
The greats grow their business by looking at the data. They make fact-based decisions. And they use KPIs to make those decisions, and they use KPIs to tell them if they made poor decisions.
With that said, let’s summarize this post:
- What are business KPIs? Key performance indicators are quantifiable metrics used to evaluate the success of a business.
- Why are KPIs important? Because they align your deepest business goals with your current reality, and as a result, help you make better business decisions
- What are the most important KPI areas to track? Customer Acquisition – which focuses on how you acquire customers and at what costs. Profitability – which aims to make sure your business is returning profits. And liquidity, which aims to make sure you don’t run out cash.
- How do you get started with using business KPIs? First, set strategic goals. Then, find out what KPIs can measure success. Lastly, start tracking them by having up-to-date books and reporting on non-financial KPIs.
These KPIs can most of the time overwhelm business owners, and that’s understandable. So, let the experts help you with monitoring your financial situation. Our team of CPAs, bookkeepers, tax experts, CFO and financial advisors can assist you with all your financial needs. We’re just a click away, so contact us now!