Using KPIs to Maximize Your Business Value
What gets measured gets done. What does that even mean? And is it accurate? Regular reporting and measuring of key activities keep you focused. We have all been on diets - being aware of calories and activity helps you make decisions to achieve your weight loss goals. The same is true for business. KPIs are critical business measurements that give business owners information to make decisions and improve results.
What are key performance indicators?
It is the scorecard of your business—the tale of the tape of how your business is doing. Many companies use them to help measure their success against your business goals. And that is how a business owner should think about KPIs. They should know what drives their business, and usually, many measurements drive you to that successful result.
KPIs help business owners keep what is important in focus. Here are some ways that KPIs help:
Stay ahead of risk and get ahead of issues. Every business owner's number one habit should be to forecast their KPIs. Most business owners calculate a point in time measurement only. That is a good start, but forecasting KPIs is a great discipline that businesses should put in place.
REALLY grow their business. By measuring KPIs, it's clear what you need to do to achieve your business goals. It's simply a matter of going back upstream and determining what you need. If I want to grow 10% and I've been growing at 5%, I need to double my growth rate; I know how many leads it took to get there and work the numbers backward.
Data-driven Decision Making. Let's say a business owner wants to be a specific size two years from now. They start breaking down those components to get there. They set targets to achieve. For example, KPIs tell you how many proposals it takes to close a deal, so I need to generate ‘X’ number of proposals to achieve this goal. How long will it take you to do that? KPIs reveal that you need to hire another salesperson to reach this number of calls. It helps you to plan, not guess. It helps you plan smartly and efficiently, so you are not shooting arrows in the air hoping that one of them will hit the target.
To take action, business owners need to ask questions on all aspects of their business. Here is a restaurant example: Most restaurants measure the number of tickets daily. The local Italian place calculates the average bill on their tickets as one of their KPIs. They measure what they call a 'perfect ticket .'How many items does the perfect ticket have? An appetizer, a dessert in addition to the entree, and maybe a specialized beverage. They realize that the number of items is part of the service and customer experience. In comparison, during lunch, a casual dining establishment measures tickets for the quality, not quantity - how many tables they turn. Why? Because they know their customers need to turn that table quickly and have that expedited service. So, just because ticket measurement is an industry KPI, different restaurants will manage it in different ways. As a business owner, you decide what's vital to driving your result.
Where can these industry standards be found?
Your banker would have this information. If you have a really good banking relationship, the banks are also looking at this.
Industry organizations, groups, publications, and conventions are good for information on industry-specific KPIs. Trade associations are among the best sources.
Here is a list of KPIs by discipline and sector published by Intrafocus.
Remember this about KPIs: They evolve over time.
Just think about 2020 until today. Always be looking at your KPI versus your goal and what you're measuring. It isn't enough to measure KPIs; you should also set targets for each of your KPIs to ensure optimal performance. Targets are the roadsigns that lead you to your destination. Make sure it is a smart KPI. Smart as in SMART goals - Specific, Measurable, Attainable, Relevant, Time-based. Specifically, focus on the 'Measurable.' It has to be something you can measure today, then focus on how to improve that measurement result. So, your marketing team is managing the number of leads (KPI) that come to you. You know how many leads you need to have to hit the company's sales goal (target). If that is 50 or 500, you can see how you are doing week to week and what adjustments might need to happen. Start with the goal in mind and work it backward. Part of that working backward is establishing what those measurements will be. And those measurements might scale over time. You might start small with 50 calls a day or a week for your measurement but ramp up over time to 100 calls per day per week. And in six months, you can see the evolution of growth in the business. Also, you may not have the capacity to do 100 calls, which forces you to hire a sales rep or technology to help you achieve those goals.
It is good practice to include leading and lagging KPIs on your business scorecard. Lagging indicators are the result of the efforts. They tell you how you performed against your goal - past tense. Examples of lagging indicators might be net profit, revenue, recurring revenue. Business owners are looking at these things already - measuring call volume, leads generated, conversion rates, and the number of clients. They may not call them KPIs. Leading indicators are those activities that help you achieve your goals. So in a sales example, it might be the number of sales calls made, the number of presentations you made, or from a production standpoint, measuring production capacity or production error rate. Those activities reveal how close to your goal over a week, month, or quarter you are. Leading KPIs help you course correct, but both are equally important. For example, if sales calls are declining at the beginning of the month, then as a business owner or sales manager, you know you need to ramp that up at the end of the month to hit your target. An excellent way to look at it is that lagging indicators are a function of accounting, and leading indicators help you predict what will happen in the future.
Using A Scorecard
Business owners need to set up a scorecard to track and measure their KPIs. Scorecards are the vehicle you use to track and store your metrics and progress. Start with a basic excel or google sheet. Add time to your schedule to measure, report, and act on these metrics. How often depends. Executives should be weekly. Everybody in the business must have a number they are trying to achieve. Companies should track some of those metrics hourly or daily. For example, if you are trying to control overtime costs, that is a daily and sometimes an hourly metric. The more frequently you look at it, the more you can make those adjustments to impact the outcome. There are a lot of different places that talk about scorecards, but one of our favorites is the entrepreneurial operating system or EOS, as described in Gino Wickman's book Traction. The key is to get started and then evolve and grow with your business.
One of my favorite metrics was cash. As CEO of my company, my CFO knew that I wanted to know where we sat with cash before my key unlocked my door. This KPI was a daily metric we used to make decisions. It also allowed us to have a cash forecast that ran out 36 months. Because of the complexity of the business and the number of acquisitions we were doing, we had significant lumpy payments that were due quarter over quarter to pay off debt or payouts. By measuring that daily and forecasting out, if I got hit with a massive AP or payroll, I knew we needed to make adjustments to make those quarterly payments, and it gave me the time to do that before it was too late to do something about it. I could predict in advance whether or not I needed to borrow additional capital from the bank or raise additional capital with our investors. We got good at it. So much so that I could predict and see those issues a year in advance, sometimes two years in advance. At a minimum, I highly recommend a 90-day forecast in any business to understand where your cash is going.
Beware of KPI overload
Some companies measure and report on thousands of KPIs. How do they have time for anything other than managing and reporting on KPIs? KPIs are important, and most likely, all of those KPIs measure mission-critical activities, but prioritizing and knowing which KPIs have the pulse on your business vitals is critical to success in an organization. How does a business owner know which KPIs to measure? What is my competition measuring? There is lots of industry information that can tell you what your counterparts or other players in the market are measuring for their success. Frequently, those are the lagging KPIs.Take those and figure out what the drivers in my business are. What is going to make that KPI move? And then work backward. What makes that needle move? And it's different for each company. It takes some time and thoughtfulness, and it's unique.
Everybody has a number, and everybody's managing to a number in your organization. As a leader, you don't need to know all those numbers. What's important is that now you can drill into the details if you want to. At my last company, we had several departments and several business units or departments within those business units. In our weekly management meeting, everybody was reporting on two or three of the most critical KPIs that we knew were the drivers in our business. So my support manager is tracking 3-4 dozen KPIs for his department. But as a leader, I only wanted to know 2 to 3 metrics. If I or someone on the executive team saw something alarming, we would drill into the details to see a bigger problem. But at the executive level, your KPIs need to be manageable. A good rule of thumb is to have 8 to 12 KPIs that keep you on top of what is happening. Think about it like this: if you were on a beach somewhere, what 8 to 12 metrics can tell you how your business is doing and if you need to get involved.
Start today. Open up a spreadsheet and get started. Track, measure, set targets, and achieve that successful business that leads you to your dream exit.
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Tom Bronson is the founder and President of Mastery Partners, a company that helps business owners maximize business value, design exit strategy, and transition their business on their terms. Mastery utilizes proven techniques and strategies that dramatically improve business value that was developed during Tom’s career 100 business transactions as either a business buyer or seller. As a business owner himself, he has been in your situation a hundred times, and he knows what it takes to craft the right strategy. Bronson is passionate about helping business owners and has the experience to do it. Want to chat more or think Tom can help you? Reach out at email@example.com or check out his book, Maximize Business Value, Begin with The Exit in Mind (2020).
Mastery Partners, where our mission is to equip business owners to Maximize Business Value so they can transition their business on their terms. Our mission was born from the lessons we’ve learned from over 100 business transactions, which fuels our desire to share our experiences and wisdom so you can succeed.