What are the metrics by which you measure your business performance? How do you know if you’re more successful than usual or falling behind? If you don’t have an answer, you’re not maximizing your chances for success, and you’ll want to consider establishing key performance indicators (KPIs).
At ForwardAI, we believe that every small business should understand how to measure KPIs. As your knowledge of your KPIs grows, so will your perspective on financial health and the choices you can make to generate growth and build success.
Table of Contents
- 1 What’s a KPI?
- 2 How to choose your KPIs
- 3 Common Business KPIs
- 4 Cash flow KPIs for small business
- 5 How to measure KPIs
- 6 Create systematized reporting to measure KPIs
- 7 What you should learn from your KPIs
- 8 Adjusting your KPIs based on data
- 9 The right data to measure KPIs
What’s a KPI?
KPIs are metrics that will help you understand your performance in many areas. KPIs can be company-wide, department-wide, or even specific to certain employees. KPIs are distinctly quantifiable.
KPIs are there to serve you. In all likelihood, no one will see the results of your KPI tracking except for you, your team and your advisors. Similarly, no one will hold you accountable for your business’s performance except you. So, you’ll be well served to pick KPIs that’ll give you a real feel for how things are going – and whose results you can use to implement meaningful growth strategies.
How to choose your KPIs
Before you understand how to measure KPIs, you need to establish those metrics. So, what makes a good KPI?
KPIs have to be:
- Measurable. A qualitative goal, like “provide better customer service,” doesn’t cut it as a KPI. What does “better” actually mean? How do you measure it? You get the gist. Instead, a KPI should be something you can easily quantify.
- Don’t use: Provide better customer service.
- Use instead: Increase 5-star customer reviews by 15%.
- Impactful. Ask yourself: Does this KPI move the needle for your company? If not, you can – and should – find a better metric to measure.
- Don’t use: Hold 3 more company outings.
- Use instead: Reduce employee attrition by one-third.
- Attainable. We’d all like to ramp up revenue by 100 million dollars this year! But, very few businesses are in a position to do so. The KPIs you set should reflect attainable goals. That doesn’t mean they should be easy – far from it. But you want these goals to be realistic — the kind of metrics that you can iterate your game plan to achieve.
- Don’t use: Increase revenue by $100 million.
- Use instead: Increase revenue by 50%.
- Time-limited. Everyone has goals about where they want to be in, say, three years. However, KPIs are measured in a defined, limited time frame. That said, setting a KPI for improvement over a year isn’t a bad thing. But, you’ll likely also want to set quarterly KPIs so you are able to make changes if you’re not on track to make your year-end KPI (or at least check in on your progress along the way).
- Don’t use: Become the top service provider in the area in 5 years.
- Use instead: Double market share by Q4.
Common Business KPIs
As you might expect, KPIs differ among businesses and industries. That said, there are common KPIs that businesses set in order to improve performance. Here are a few examples of common KPI categories:
- Staff and people: staff turnover, employee happiness, gender parity, time to hire
- Customers: customer acquisition cost (CAC), customer lifetime value (LTV), new customers, customer satisfaction
- Sales and product: conversion, revenue, margins, delivery time, cost of goods sold (COGS)
- Technology and ops: sprint productivity, issue resolution, deployment
- Financial: EBITDA, expenses, cash flow from financing
This is, of course, a non-exhaustive list. But you can use these categories as a starting point to create measurable, impactful, attainable, and time-specific KPIs for your business.
Cash flow KPIs for small business
Due to the importance of cash flow in business survival (60% of businesses fail due to cash flow issues!), it’s incredibly important to establish KPIs to improve your cash flow. Here at ForwardAI, delivering cash flow analysis is the name of the game – so, let’s take a particular look at cash flow KPIs.
Here are a few cash flow KPIs you can consider establishing that can make a huge difference in your business’ day-to-day cash flow:
- Slow your burn rate.
- Increase your amount of working capital.
- Improve your cash flow conversion cycle.
- Increase your quick ratio.
- Increase your accounts payable/receivable turnover.
That’s, of course, just the start.
How to measure KPIs
Have your KPIs all sorted? And they’re definitely measurable? Awesome. Now, let’s discuss how to measure KPIs.
The lynchpin of KPI tracking is data. You can, of course, set up your quantifiable KPIs with the best of intentions. But if you don’t have a way to get that data to measure them, you’re going to be out of luck going any further.
First, you’ll need to understand where you’ll be getting your data. Are you using a reporting dashboard from one of your analytics tools, or teaming up with your financial professional? Are you relying on one of your employees to provide numbers so you can manually calculate your metrics? Any answer is fine (and, usually, it’ll be a combination of a few), and will vary based on the operations of different businesses.
Make sure you have the solution for your business.
As soon as you establish your KPIs and the data you’ll need to measure them, figure out where you stand right now. For instance, if your KPI is to improve your operating cash flow, then you’ll need to go to your cash flow statement and find the number that you’re using as a baseline.
Create systematized reporting to measure KPIs
How often are you going to measure KPIs?
If you’ve set quarterly goals, for instance, consider checking in on your progress each week. The more data you’re able to record, the more accurate picture you can get of how far you are from meeting your goals. That doesn’t mean you should necessarily pull numbers every day, though. Some metrics, like website traffic, for instance, don’t reveal broad trends on that micro of a level. You’ll need to zoom out a little to really see your peaks, valleys, and cycles.
How are you going to record them?
Once you’ve decided the frequency with which you’ll be tracking your KPIs, set up a system to record your data. (Again, if you’re using a reporting platform for one of your KPIs, some will generate reports for you.) What’s nice is your KPI-tracking system doesn’t have to be fancy at all – a simple spreadsheet can generally work for straightforward metrics. You just want to make sure you can see your trends, and if you’d like to create a visualization, you’re using a method that will enable you to create one (that’s why a spreadsheet is a common favorite).
For cash flow and complicated KPIs, we recommend our dashboard that connects to QuickBooks Online and Xero in an instant.
What you should learn from your KPIs
What’s the point of learning how to measure KPIs at all? There are both short- and long-term lessons that are extremely important for entrepreneurs to be able to see, including:
In the long-term:
- If you’re growing the way you expect to.
- How you compare with other industry baselines.
- If your expectations are aligned with the reality of your operations.
- What you should focus your efforts on going forward.
In the short-term:
- If your data is trending in the right direction.
- If the goals you’ve set are realistic.
- If one sector of your business is lagging far behind others in productivity.
- How specific employees are impacting the growth and success of your business.
Adjusting your KPIs based on data
Sometimes, things don’t go quite to plan. That’s okay – it’s simply the nature of business. One of the reasons that you’re tracking KPIs is to understand what’s going right, what’s going wrong, and the why behind both.
It’s important to understand that KPIs don’t have to be set in stone. Nor should they be – after all, the point of setting metrics that you feel are attainable is for your business to hit them. If circumstances change, you don’t just throw in the towel and say, “I’m not going to hit this!” Instead, take the data that you’ve collected, examine your trends and adjust your KPIs.
Don’t move the goalposts so your goals are no longer a stretch and you’re not pushing you and your employees, but also be realistic with yourself about what you can accomplish – after all, you want to hit those metrics.
The right data to measure KPIs
Data, data, data. You need it in order to set metrics, see how you’re trending and measure your outcomes.
ForwardAI makes it easy to access your real-time financial data for tracking cash flow KPIs. Our app connects right into your QuickBooks Online account to populate a dashboard full of valuable information. You’re able to see your inflows, outflows, and general cash position in near real-time.
Connect your business and start monitoring your cash flow ASAP. See the financial KPIs that matter to your business – and get on your way to meeting them.
The information in this article is not financial advice. This content is general while every financial situation is unique. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.
Images via Pexels.