When most entrepreneurs begin their journey it is not uncommon for them to state vague goals for what they want to achieve. For instance, “To be the best” or “To make a lot of money.” But as any successful entrepreneur will tell you, every journey has landmarks to indicate the right road is being travelled.
Every business needs some kind of measurements to ensure they are meeting strategic and operational goals. In order to account for any resources spent it is not only important, but also necessary. And that is the purpose of key performance indicators, KPIs. They tell you whether or not you are reaching your goals and can show you how you measure up to the competition.
Businesses of all sizes need KPIs to gauge their performance over a specific period of time. In many ways it is the only sure way to know that a company is on track with its objectives. And by clearly stating the goals it allows everyone to maintain focus. And while the sales teams may have different specific KPIs from the accounts department, each staff member will be pulling towards the same overall goals so long as the KPIs are aligned.
Staff motivation is also enhanced as it allows everyone to celebrate victories step by step. With KPIs tracking progress at each stage of a task, staff don’t have to wait till an end of year review to be appraised. They can use each checkpoint as a means to boost morale and better position themselves for further gains.
KPIs further allow for more efficient allocation of resources. Often time and money are thrown at a problem in hopes of finding a solution. Yet if not thrown in the right direction it can be like buying new pipes when the reason for the high water bill is a leaking kitchen faucet. By being able to properly track all relevant indicators businesses can keep an eye on important aspects of their operations. It is a basic principle of business that only that which is monitored can truly be managed.
That is why beyond setting KPIs it is vital to ensure that the right KPIs are used. KPIs generally fall into four different categories; improving customer satisfaction, boosting revenue, affecting cost reduction and implementing a more efficient work process. And when setting KPIs the metrics used are specific measures of behaviour or performance. A metric for efficiency with regards to deliveries, for example, may be the amount of time it takes from the placement of an order to a parcel being handed to the client.
Sometimes the most obvious metrics don’t necessarily give you the most beneficial data. If you are trying to use these metrics to decide where to allocate funds or if the business is viable the results could prove fatal to your business in the long term. Indicators could be lagging or leading. A lagging indicator being a metric that points to past behaviour. While a leading indicator is used to measure future goals you hope to achieve. In trying to lose weight, the weight indicated on the scale may be a lagging indicator. But in order to attain set weight loss goals one must employ a more appropriate indicator. Namely one of calorie intake against calories burnt.
Determining the right KPIs will always depend upon factors such as the industry, size of the company and the immediate goals it has. One way to ensure the right KPIs are set is to analyse data from a broader range of sources. When deciding which marketing campaign should be continued, one may ask marketing to give figures of cost per clicks (CPC), for example. While it may make sense that the campaign with the lowest CPC is doing best, the picture may change if the sales team shows that CPC notwithstanding, another campaign actually has a higher sell through rate.
Another factor that makes KPIs relevant is how closely they are tied with what you are actually trying to achieve. Or rather, what you should be trying to achieve. To follow on from the previous example, a company may set a goal to ramp up their social media interaction. However, while higher followings are not bad, the focus should be on how those numbers translate to profits.
The numbers engaged on social media should not be the focus, but rather how those people engaged are behaving with regards to taking up products or services offered.
Finally, when setting KPIs, it is necessary to use them for what they are intended. They are aids to boost productivity and profitability. Therefore, all KPIs must be actionable. The data collected must help bring some kind of measures to be implemented. Dependent on the business model adopted, all departments should be incorporated in the formulation of a strategy that makes use of KPIs. Metrics must be cross-cutting. Financial, customer related, process and organisational metrics need to be tracked. And all need to be applicable to the specific line of business. Copy and paste KPIs just will not cut it.
While all the above may seem an obvious course to take for any business, the large majority of small businesses and startups fail to use the benefits of KPIs to grow their business. And though by no means the only factor, this contributes to the failure of many small businesses to break to the next level. Many small business owners and solo entrepreneurs feel they lack the manpower to juggle technicalities like KPIs as well as the day to day running of their enterprises. However, while formulating and monitoring KPIs may take a little time, doing it right helps businesses work more efficiently and saves more time in the long run.
As has been noted, implemented correctly, KPIs can help businesses identify where they need to pay more attention and how to more accurately map out their path for growth. Misappropriating funds to areas that are not profitable regularly leads to time being lost resolving problems and trying to dig the business out of the red. Without the information provided by KPIs climbing back into the black is that much more difficult.
Due to limited resources, small businesses already find themselves at a disadvantage. Mistakes are amplified without the funds to fix any cracks. Alternatively, even small increases in productivity across the board can make a world of difference. Therefore, having staff updated on company strategy and the KPIs being used to attain goals is needed.
Proper selection and application of KPIs should see a company of any size better placed to grow and be successful. For small businesses especially, the path to progress is more clearly laid out.