Understanding KPIs and Business Success
A Key Performance Indicator (KPI) is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs to evaluate their success at reaching targets.
Key Performance Indicator (KPI) is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs to evaluate their success at reaching targets. Learn more: What is a key performance indicator (KPI)?
Selecting the right one will depend on your industry and which part of the business you are looking to track. Each department will use different KPI types to measure success based on specific business goals and targets. Find out what types of key performance indicators are relevant to your department, industry, or role.
Want to find out how your business is performing? Setting and analyzing performance indicators for your company is the best way to forecast and get on track with your business goals.
Creating KPIs or Key Performance Indicators will help you measure your company’s success. The question is what to focus on? How you measure performance says a lot about your company’s objectives.
KPIs and your business strategy
Key Performance Indicators (KPIs) are the elements of your plan that express what you want to achieve by when. They are the quantifiable, outcome-based statements you’ll use to measure if you’re on track to meet your goals or objectives. Good plans use 5-7 KPIs to manage and track the progress of their plan.
Anatomy of a KPI
The anatomy of a structured KPI includes:
A Measure – Every KPI must have a measure. The best KPIs have more expressive measures.
A Target – Every KPI needs to have a target that matches your measure and the time period of your goal. These are generally a numeric value you’re seeking to achieve.
A Data Source – Every KPI needs to have a clearly defined data source so there is no gray area in how each is being measured and tracked.
Reporting Frequency – Different KPIs may have different reporting needs, but a good rule to follow is to report on them at least monthly.
Examples of KPIs
Depending on your industry and the specific department you are interested in tracking, there are a number of KPI types your business will want to monitor. Each department will want to measure success based on specific goals and targets. Take a look at the departmental KPI examples below to learn more about the one you should be measuring.
Examples of Sales KPIs
Number of New Contracts Signed Per Period
Dollar Value for New Contracts Signed Per Period
Number of Engaged Qualified Leads in Sales Funnel
Hours of Resources Spent on Sales Follow Up
Average Time for Conversion
Net Sales – Dollar or Percentage Growth
Examples of Financial KPIs
Growth in Revenue
Net Profit Margin
Gross Profit Margin
Operational Cash Flow
Current Accounts Receivables
Inventory Turnover
EBITDA
Examples of Customer KPIs
Number of Customers Retained
Percentage of Market Share
Net Promotor Score
Average Ticket/Support Resolution Time
Examples of Operational KPIs
Order Fulfillment Time
Time to Market
Employee Satisfaction Rating
Employee Churn Rate
Examples of Marketing KPIs
Monthly Website Traffic
Number of Qualified Leads
Conversion Rate for Call-To-Action Content
Keywords in Top 10 Search Engine Results
Blog Articles Published This Month
E-Books Published This Month
With the foundational knowledge of the KPI anatomy and a few example starting points, it’s important you build out these metrics to be detailed and have specific data sources so you can truly evaluate if you’re achieving your goals.
Remember, these are going to be the 5-7 core metrics you’ll be living by for the next 12 months.
A combination of leading and lagging KPIs will paint a clear picture of your organization’s strategic performance and empower you to make agile decisions to impact the success of your team.
7 KPIs to consider for your Business Success
Although it’s up to you to determine which KPIs are best for your firm, we’ve included seven of the most relevant KPI meanings that small business owners should consider using.
1. Cash flow forecast
Cash flow forecasts let businesses assess whether their sales and margins are appropriate, and are consequently one of the most critical KPIs for small companies to track. To make your cash flow forecast, add the total cash your business has in savings to the projected cash value for the next four weeks, then subtract the projected cash out for the next four weeks.
Savvy business owners perform regular cash flow forecasts so they can identify problems in the early stages and make necessary adjustments. Cash flow forecasts can help businesses anticipate future surpluses or shortages. They can also help with tax planning and loan applications.
2. Gross profit margin as a percentage of sales
No business can achieve success if it’s paying out more to suppliers than it’s netting in sales. Gross profit margin as a percentage of sales demonstrates total profits compared to revenue.
First, find your business’s gross profit margin (GPM) by dividing your gross profit amount by your sales. Divide that value by your sales amount to find out how much of your GPM makes up your overall sales. Multiply that by 100 to express your gross profit margin as a percentage of sales.
The benefit of tracking this KPI over time is that you can easily quantify how much money you’re keeping against the amount paid out to suppliers.
As businesses retain more money, gross profit margin increases. But a decrease in gross margin as a percentage of sales could indicate that a company is overspending on its supplies. Owners would need to reduce overhead costs or increase prices on goods and services to compensate.
3. Funnel drop-off rate
Your funnel drop-off rate assesses the number of visitors who abandon a conversion process — or sales funnel — before completion. To calculate funnel drop-off, start by finding the number of visits for a particular conversion step in the funnel. Then, subtract the number of visits that occurred during the first step. Divide the value from the specific conversation step by the visits that took place during the first step to find the number of customers that you lost along the way.
By identifying when prospective buyers abandon the conversion process, companies can identify problems and make necessary adjustments to boost sales. With so many small businesses relying on the internet as a sales tool and with face-to-face interaction declining, funnel drop-off rate has become one of the most crucial performance indicators to track.
4. Revenue Growth rate
Revenue growth is a financial KPI that refers to the rate at which a company’s income, or sales growth, is increasing. To find revenue growth rate, begin with your business’s total revenue for the current year. Next, divide current income by total revenue from the previous year to find the rate of growth. By calculating the revenue growth rate regularly, you can assess whether growth is increasing, decreasing, or plateauing, and by how much.
5. Inventory turnover
Inventory turnover measures the number of units sold or used in a given period and is valuable because it reveals a business’s ability to move goods. Inventory turnover can be found by adding up the cost of sold inventory, then dividing that total by the value of the inventory remaining at year’s end. Businesses should want to pursue a high turnover rate, but not by slashing prices significantly.
6. Accounts payable turnover
A company can’t keep its doors open for long if it fails to pay suppliers. Accounts payable turnover is a measure of the rate at which your business pays for goods and services in a given period. To find accounts payable turnover, add up the cost of total supplier purchases, and divide by average accounts payable. Once you know how much you spend on suppliers, you can determine if you need to take steps to reduce spending.
7. Relative market share
One of the most crucial performance indicators, relative market share shows you how much of a given market your company controls. Unlike internal metrics, relative market share reveals how a company is performing relative to its competitors in the same space.
A small bump in profits may matter less if your company is falling behind its competitors. Once you calculate your relative market share, you can make strategic adjustments to your product and service offerings to improve long-term profitability for your business.
Summary
In summary, the most successful businesses use KPIs in some form or fashion to help them measure company success. As a small business owner, you should work to implement KPIs into your business strategy. Doing so can help you evaluate your progress and set new goals.
There are various types of KPIs, and the opportunities to define KPIs are endless. Starting with the seven that we provided is an excellent way to get your company on track.
