Don’t have KPIs for the sake of it – understand how they can drive the success of your business and make sure they’re tightly tied to your goals and objectives.
First, just in case, I ought to explain what KPIs are, though most of you can probably skip this bit. KPI stands for ‘key performance indicator’ which is a quantifiable metric used to gauge business performance.
They’re used to identify problems, drive change and motivate teams. They can also help reassure and persuade outside investors, giving substance to a dazzling pitch.
But there are millions of possible KPIs depending on the sector you operate in, the stage your business is at and various other variables – how do you pin down a manageable, sensible set of things to track?
Start with goals and objectives
Each of your KPIs needs to tie in directly to your business’s long-term goals and immediate objectives.
If you’ve recently put together a business plan, either because you’ve just started up or are in the process of expanding, you’ll have these at hand.
Otherwise, you’ve hopefully got objective setting and objective reviews built into your year – typically objectives are set at the start of the year then reviewed quarterly or at mid-year.
If you look around online, or in management manuals, you’ll find loads of people saying “It’s really very simple…” then giving totally different definitions of goals, objectives and KPIs.
Don’t worry too much about that. Whichever definitions you use, the important thing is to break the process down into different stages.
Here’s how I define them as a starter for ten:
- Goals set out what you want to achieve, e.g. ‘increase market share across the North West of England’.
- Objectives are specific, measurable steps along the way, e.g. ‘increase the number of client enquiries from outside Preston’.
- Strategy is how you’re going to go about it – ‘launch a geographically-targeted marketing campaign in Lancaster and Blackburn’.
- KPIs are numbers you track to measure the success of the strategy and progress towards the objective – how many client enquiries did we have from Blackburn in the past 30 days?
Some common KPIs
Some of the most common accounting KPIs are:
- EBITDA – earnings before interest, taxes, depreciation and amortization
- MRR – monthly recurring revenue
- CLTV – client lifetime value
EBITDA is popular because it can provide a clearer idea for those in the business of how it is really performing, rather than either turnover or profit.
MRR is an important metric for subscription-based businesses which might include apps or streaming services. One-off promotions, seasonal bumps and discounting can conceal underlying issues which MMR, a long-term metric, reveals.
And client lifetime value is a really long-term metric. It tells you how much each customer is worth to you over the lifetime of your relationship – do they spend a lot upfront and then just sit on your books, spending nothing? Or are you identifying ways to keep them engaged, by offering new products or services, or upselling to higher tiers?
Manufacturers will tend to measure things like overall equipment effectiveness (OEE), while professional service businesses might choose to monitor utilisation rate – the amount of time each member of staff is spending on billable work.
KPIs for hard-to-measure activities
The obvious KPIs won’t work for every business activity. For example, creative work is notoriously difficult to measure.
Is the designer producing good logos? That’s subjective. You can’t measure it.
Is the designer producing more logos in Q3 2020 than in the comparable period last year? This is measurable but isn’t likely to incentivise people to do their best work.
Instead, you could consider measuring client satisfaction based on a formal post-project feedback process. As well as asking how happy they are, you could get them to rate how likely they would be to recommend your agency to others after the work you’ve done.
Or you can just accept that some of your KPIs will be qualitative rather than qualitative, based on the perceptions and feelings of your management team rather than hard numbers.
As an accountant, I instinctively shake my head at that, but it can work as long as there’s real thought behind it and some attempt at making it measurable.
KPI mistakes to avoid
There are a few common mistakes when it comes to KPIs.
First, people sometimes give themselves too many KPIs to track.
Automation can make it easier to stay on top of lots of KPIs, especially if you have cloud accounting software in place which integrates with your customer relationship management (CRM) package. You could even draw in key marketing metrics via Google Analytics.
But, still, when you’ve got to sit down in a management team meeting and report on how things are looking this quarter, a smaller set of really carefully chosen KPIs is the way to go. Which, I suppose, is what makes them ‘key’.
Sometimes, you’ll also find KPIs that use imprecise language like ‘efficient’ or ‘world class’. Words like that can work for goals and objectives but KPIs need to be more precise. What’s the scale for ‘world classness’? How do you know when you’ve achieved it?
Another thing to avoid is chopping and changing. KPIs work because they allow you to track change and progress over time. If you keep taking them out, adding new ones, or tinkering with the way they’re measured, they won’t tell you what you need to know.
Finally, watch out for vanity KPIs. These are metrics you’re monitoring purely so you can boast about them or to cheer yourself up – “more than 300,000 subscribers!” (290,000 of whom haven’t logged in since 2013, but we don’t mention that.)
Smart KPIs drive decisions
I can’t underline this enough times: don’t track KPIs because it’s something businesses are meant to do – do it because they help you make the right choice to succeed and grow.
And don’t start with KPIs – come to them at the end of the process when you’ve nailed down goals, objectives and a strategic plan.
We can help you identify the right KPIs for your business – get in touch today.