KPIs, key performance indicators, are essential metrics that allow you to monitor and track your business performance. They help you navigate your way to success and growth that is crucial for exploiting new opportunities and tapping into new markets. Unfortunately, most companies get their key performance indicators completely wrong by copying the metrics others are using, which may be ideal for them but not you. This often results in a business losing its competitive advantage or a significant market share, which ultimately kicks the business out of the competitive race.
Don’t Copy the KPIs of Others, Follow Your Own
Although your gut feeling matters and often yield prominent results, this is now an old strategy that no longer defines your company’s success. Running a business is no easy feat as it requires a thorough analysis of financial results. Businesses who are good at examining and evaluating their finances mostly succeed and survive in the market for long durations. According to a study, “Business metrics or KPIs display a measurable value that shows the progress of a company’s goals.” To evaluate your business’s health, specific KPIs suitable to your industry provides an ideal snapshot of where your firm is going— and whether or not it’s going in the right direction. Every business is unique to some degree, and businesses can’t just copy similar metrics used by others in your industry.
Profit, Alone, is No Measure of Success
Profit is not a measure of success for your business. Although it can define your company’s financial health, it is not the only thing that contributes to a company’s success. Companies have short and long-term goals, and KPIs can help you make more confident decisions regarding your company’s growth and development. Profit, along with KPIs, plays an integral role in defining your company’s success as a whole. Since every business is unique and has a different business model, companies need to customize the KPIs that are the best fit for their needs and purposes.
You can follow tons of KPIs to track and monitor your company’s performance, but core KPIs can provide you the insight you are looking for. What matters most is your company’s performance and how much profit it makes.
To measure and understand your customers, you need to know KPIs such as customer retention rate, conversion rate, relative market share, customer profitability score, net promoter score, etc. To measure and understand your financial performance, you need to know KPIs such as net profit, revenue growth rate, net profit margin, gross profit margin, operating profit margin, return on investment (ROI), cash conversion cycle, etc. To measure and understand your internal process, KPIs that can be used are order fulfillment cycle, project schedule variance, project cost variance, capacity utilization ratio, bookkeeping accuracy level, quality index, and process downtime level. To measure and understand your employees, KPIs such as staff advocacy score, employee engagement, absenteeism level, human capital value, and 36-degree feedback score can be used.
Basic Level KPIs
Small businesses usually have human resources, capital, and finances to evaluate their performance against all of the KPIs mentioned above. Therefore, they usually go with the basic, yet most effective, KPIs, which include the following:
Whether small or large, businesses track their revenue to ensure that their income maintains a steady pace. When the revenue trend shows a downward sloping, the business needs a new marketing strategy to boost its revenue. Similarly, when revenue shows an upward trend, it means that the business’s revenue is increasing, and that’s the point where businesses need to maintain the trend.
When businesses evaluate expenses in terms of a KPI, they consider spending trends. The reduction in expenses is healthy for a business because fewer expenses mean a stronger income statement. Expenses should be a strong focus of any business as they can make or break a company financially.
Gross Profit Margin
Gross profit margin is the percentage of each dollar you earn after subtracting direct expenses. It reveals how well you are doing in keeping a balance between your income and expenses.