Why Even Small Businesses Need KPIs
Setting business goals and establishing Key Performance Indicators can make the difference between surviving and thriving as an SME.
As every entrepreneur will know, planning is key to any business venture. It may be a cliché, but the old saying certainly rings true: ‘if you fail to plan, you plan to fail.’
Of course, nobody actually goes into creating a small business planning to fail, but not having visibility of how your business is performing, can be almost equally as risky.
This is why setting KPIs – or Key Performance Indicators – has long been a staple part of running a business successfully. By setting business goals and tracking performance against them, you can gain a clear understanding of how your brand is performing compared to your expectations.
So why don’t many small businesses measure KPIs?
All too often, micro and small business owners shy away from many of the structured business processes that we typically associate with larger organisations. While there are good reasons why they often look to deviate from the rigid frameworks of corporate life (and the freedom and flexibility of choosing different workspaces and working hours can be great!), there are benefits in adopting the core foundations of proper business management.
The value of KPIs
KPIs evaluate the success of a business or a specific activity.
No matter whether you are a work-from-home freelancer or a corporate CEO, it’s always important to not only set targets but also identify how you intend to track progress. For a CEO this makes it possible to justify performance to a board or shareholders; for a freelancer that provides services to other businesses, this may be necessary to showcase your value to a client.
Yes, you may have chosen a more flexible and agile career path to get away from endless reporting, but never underestimate how key metrics can serve to build trust and confidence with clients or your supply chain.
Taking Control
KPIs enable you to know precisely how you’re performing against a key business goal. They provide a level of accountability. At some point in time, we all fail to hit our targets and there’s often valuable information hidden within those key performance metrics. For example: have you failed to attract enough visitors to your website? Has your social media marketing stalled? Are you not attending enough networking events to build the right connections?
Being aware of your performance, and the drivers behind it allows you to put actions in place to get you back on track. The sooner you can be aware of specific issues, the sooner you can work to rectify them.
Transparency helps you make decisions based on facts rather than perceptions. Remember, measuring is the first step to managing.
Psychologically, these metrics can help you feel more focused and in control as a business owner. By ticking off your short-term targets and making measurable progress, you’ll find yourself more motivated – something that can often be a problem for workers who feel they are lacking direction.
The Benefit Of Hindsight
Not only do KPIs help you plan ahead, but they also give you something to look back on. Nothing boosts the motivation levels quite like realising how far you’ve come – whether in a month, a year or five years.
If you keep your KPIs the same over these five years (monitoring your revenue and profit or perhaps your total number of clients and customers) you give yourself the power to analyse. Asking who, what, when and why encourages you to learn and continually evolve.
Getting Started
There are many KPIs that a business can put in place, depending on their specific goals. But at a basic level, there are a handful of KPIs that are relevant to any business and are a good starting point.
There are five core pillars of any business; Marketing, Sales, Delivery, Customer and Finance. Having at least one KPI in place to measure performance in each of these areas is invaluable.
- Marketing: Leads by marketing channel – Knowing the volumes of leads generating by each channel enables companies to focus time and budget on those that are working best.
- Sales: Volume per product/service – Provides visibility of which products/services are most popular, and those which are not doing so well.
- Delivery: Delayed delivery by cause – Getting your product or service to your customer as agreed, and on time is essential. Understanding the causes of delays ensures keeping every element of your sales cycle running like a well-oiled machine.
- Customer: Complaints by type – Complaints and feedback will highlight areas of your business that require improvements, from a customer perspective.
- Finance: Gross Profit Margin – Gross profit margin is a good health check for a business. It allows them to see the profit they are generating after deducting the costs of sales from their revenues.
- Finance: Operating Cashflow Ratio – Cashflow is one of the most significant challenges for small businesses. The Operating Cashflow Ratio measures the ability of a business to pay its current liabilities from the cash generated from its trading activities. A ratio of less than 1 indicates short-term cash flow problems that need to be managed.