Key performance indicators – otherwise known as KPIs – are metrics that are used to monitor the success or failure of any aspect of your organisation’s activity.
They help you evaluate how well the solutions, processes and people within your business are supporting your everyday operations, your profitability, and ultimately, your growth.
Why should you use KPIs?
You cannot make top line decisions without the bigger picture. If you are not using KPIs to give you a clear overview of your company’s performance, you cannot confidently make adjustments that will lead to positive change. You’re simply leaving your growth strategy vulnerable to poor decision making and factors that are outside of your control.
Every business that’s serious about sustainable progress should track relevant KPIs against their own goals and targets – but more than this, they should be prepared to monitor ongoing trends, not just raw data.
Explaining KPIs
Generally, there are two types of business KPIs: financial and non-financial. Non-financial targets could be broken down further into:
- Operational KPIs, which you can use to measure the effectiveness and efficiency of a certain team, department, or even your business as a whole. These metrics will inform you on things like how productive your staff are, how successfully you are retaining employees, how satisfied your customers are with your approach, and much more.
- Customer-focused KPIs, which track how people are engaging with your marketing campaigns. These KPIs can be used to justify marketing spend in certain areas.
What are the most commonly used KPIs?
Financial KPIs are often the easiest to track, particularly if you have the right accounting software in place (more on this later). Examples of useful financial KPIs include:
- Revenue
- ARR (Annual Recurring Revenue)
- Revenue per client
- Number of sales
- Gross profit percentage
- Net profit
- LTV (Lifetime Value of a Client)
- CAC (Customer Acquisition Cost)
- Overhead expense
- Cash at bank
Examples of non-financial KPIs include:
- Client retention rate
- Customer satisfaction index (often measured by CSAT scores)
- Net Promoter Score (ie, how likely your customers are to recommend your business to other people)
- On-time rate
- Headcount
- Staff retention rate
- Average time to hire
- Internal promotion rate
- Staff morale
- Salary competitiveness ratio
Combining KPIs for more useful insights
Measuring interdependent KPIs can provide you with a much clearer idea of what’s actually happening within your business.
At a basic level, it’s often a good idea to track sales or revenue against last year’s figures and current year budget, so you can see at a glance whether you are on track to reach your new targets (or not). However, if you are seeing a strong upwards or downwards trend and are unsure what’s caused it, you can merge this financial data with other factors – such as your current client retention rate, customer satisfaction rate, or even staff retention rate – to see if there is a direct correlation that could explain what’s going on. Once you have this information to hand, you can use it to decide what you’re going to do to reverse any worrying trends or capitalise on any unexpected gains.
For example, if revenue is going up but profit margins are going down, you may be in the middle of identifying a pricing issue that could be hindering your growth or affecting your position in your marketplace.
You could also monitor your revenue by headcount, or perhaps margins by headcount, to measure how much value their employees are bringing into the business. If revenue is down when fewer people are employed within your business, staffing could be the issue – so you know you need to take steps to address this problem and improve your resources.
How do you know which KPIs you need to track within your business?
With so many KPIs to consider, finding the most practical metrics for your individual circumstances can be a challenge, particularly if the practice is new to you.
The trick is to look at the key drivers that make your business successful. You know your business better than anybody. Think about which KPIs are going to be the most useful to you, not just in terms of measuring your firm’s financial health and ability to grow, but with regards to the product or service you’re providing, the consumers you’re serving, and the employees who play a vital role in pushing your business forward.
Bringing in a third party to kickstart the process can be incredibly beneficial – and Dartcell can be that all-important outside voice that asks the right questions and sets you on a clear path to finding and implementing the right KPIs. Our outsourced finance directors will open up the conversation before exploring your ideas, assessing your options, and explaining the value of tracking each KPI you or they suggest.
Could it be time to improve your in-house systems?
As is often the case with our clients, you may not have the right data collection processes in place in order to be able to get and analyse the information you need. We often find that some of the businesses we work with cannot start tracking their key measurements because their existing systems are just not up to the job.
One way of getting around the problem is implementing more robust software that automates much of the process for you; for example, a more sophisticated accounting system that can present much more granular data in real time, instead of a spreadsheet that’s updated manually (and often intermittently!) by your team.
If it’s clear that change is needed, we can not only help you source the best tech, but also suggest ways to engage your staff in the process get them to understand and support your new goals.
How often should you review your KPIs?
You should be keeping an eye on your KPIs on a regular basis and reviewing them during your regular board meetings. It’s also important to monitor KPIs cumulatively, as well as on a monthly basis, to ensure you don’t make big choices based on short-term data.
The single most important thing to remember when tracking KPIs, however, is that you need to take action with the information you uncover. They are not just numbers on a screen – they are tools for improvement that can be incredibly powerful when used in the right way!