Know Your Numbers, Know Your Business
Entrepreneurs are an ambitious subset of our population. They’re able to take crazy-awesome, world changing ideas and turn them into feasible business models. Which is so cool! But vision and drive can only go so far – this is where KPIs can save the day. KPIs are like little snapshots of a business that an owner can leverage to make informed decisions to help their business flourish and meet goals. In part One of our series on company metrics we plan to introduce the fundamentals of company metrics and pass along our four KPI rules to live by to give you a leg up in your KPI tracking journey.
What’s the 411 on KPIs?
Key performance indicators or KPIs for short are a measure of a business’s performance against a set of targets like industry benchmarks or company goals. At their most simple they can be called “company metrics”. Typically, KPIs can cover a variety of areas of a business including financial indicators like liquidity (working capital ratios), efficiency (days outstanding ratios), profitability (gross and net profit margins) and cash availability, but they can also be more anecdotal like quality of customer experience (net promoter scores) or in store foot traffic.
Before we dive further into the importance of tracking metrics and our four rules, I want to underline the fact that knowing your numbers directly impacts the success of your business. In fact, if you don’t have a personal mantra, might I suggest, “Know thy numbers, know thy business.”
What’s the Big Deal, Why are KPIs Important?
As a number lover, I could talk about them all day, but I’ll get to the point. There are three main reasons I believe in tracking KPIs and they are as follows.
- It is difficult to know where to go, if you don’t know where you’ve been and “what gets monitored gets managed” (thank you Peter Drucker). KPIs provide a ROADMAP. A lot of entrepreneurs blindly work day after day making ‘as many sales as they can’ and growing ‘as much as they can’ but if they’re not reviewing their roadmap and recording the targets they did and did not hit and understanding why or why not, then they can’t learn and evolve their business through intentional decisions.
- Knowing your numbers helps you keep track of AND stay laser focused on the critical numbers of your organization (i.e. what is truly important to your business!) They help you stay LASER FOCUSED. There’s a lot of ‘noise’ when you’re an entrepreneur but in reality, there are actually just a few REALLY critical numbers and ratios that you need to keep track of to ensure your company succeeds.
- While whole numbers such as the variance analysis between a business’s budget versus their actuals is useful, metrics like ratios and the relationship between those whole numbers is more insightful. There are already so many numbers an entrepreneur reviews on a daily basis and metrics are all about cutting through the noise.
The Four Rules of KPI Tracking
Now that we’ve given you a run down on company metrics, it’s time to share our four rules of KPI tracking starting with rule number one and relevancy.
- Is the KPI Relevant? There is no point in wasting time tracking data that is not relevant or important to your business.
- Is the KPI Easy to Track? The value of a metric is diminished the longer it takes to produce the KPI and therefore report on the KPI. And if this is the case, maybe there is another indicator that is more simple to procure and can thus provide better insight into the business. (You can download our handy KPI tracking tool here)
- Is the KPI Easy to Understand? Metrics are useless unless they are easily understandable by anyone reading them. If it takes hours to explain the reasoning behind a certain metric, then it is not really a great snapshot of your business, is it?
- Is the KPI Misleading? If your KPI deviates from the way your industry generally accepts or understands them, then the explanation for this deviation must be highly visible to anyone reading them, otherwise, the KPI is going to be misleading and become difficult to understand.
If you follow these four simple rules of KPI tracking, you’ll find it easier to choose the critical numbers for your business and not waste time on metrics that may not be the most prescient.
What KPIs are Appropriate for Your Business?
If you were hoping our rules pointed you in the direction of specific company metrics, I’m sorry to disappoint, but the most important and dare I say more interesting metrics (#nerdlife) will be different for each business. There are certainly general company metrics that every business tracks, like customer conversions, however, the more insightful metrics will be unique to your business model, company goals, size, industry and so on and so forth.
For example, a CPG startup company looking to scale quickly will be tracking different KPIs from an established accounting firm, like Simple Startup, because each company is at a different stage in their growth trajectory and are from vastly different industries.
The Simple Startup Methodology for Defining KPIs
The way Simple Startup goes about defining KPIs for a new client is primarily based on the customer journey for that company. It all starts by taking a look at their Marketing program, then Sales, then Operations, then Finance and finally Customer Success. To get an even more holistic vision of company metrics, we also look at the customer through the eyes of their financial model which allows us to back into some of their metrics.
Sample Marketing Metrics
As a brief example of defining new KPIs, we can look at sample marketing metrics. First, what are the revenue drivers of the business? A big piece of this is the conversion of leads. So then we can come up with KPIs that we will track on a regular basis (weekly, monthly, quarterly) that point to the company’s capabilities in lead conversion. These KPIs might look like:
- Total Website Visits
- Average Time on Page
- Cost Per Lead (CPL)
- Click Through Rate (CTR)
- Customer Lifetime Value (LTV)
As mentioned previously, since metrics are customized for each business, and you know your business best, you will already have a lot of insight and ideas for the metrics to track to help you push your business forward.
Final Food for Thought
There is so much more to be said about KPI tracking, especially since we haven’t gotten to the nitty gritty of specific metrics just yet. In Simple Startup’s forthcoming series on company metrics, you can expect to learn more about specific performance indicators, like liquidity and sales metrics, and, of course, sharpen your financial skills while doing so, but first, I wanted to leave you with some words of wisdom.
Metrics are about understanding your business, so it should come without saying that as your business evolves, so should your metrics. You should always be asking yourself have these metrics become mundane? Are they still relevant and important? Are we still getting value from them? Don’t be afraid to change your company metrics – change is good!
We look at metrics as part of our accounting and fractional CFO support services and customize them specifically for each business we partner with. If you’re struggling with knowing your numbers or are not looking into your metrics yet, you need to! But all is not lost, contact us and see how we can support you in implementing these best practices within your business. AND if you’re looking for a simple metric tracking tool, we made one just for you and you can download it here.