If you want to grow your business, boost your performance, or even just survive an economic challenge like the one we’re currently facing with COVID-19, you need to measure your results.
The old idiom “what gets measured gets improved” has never been more true than it is now. With the speed of our economy and the complexity of global business and the online marketplace, it can be easy to feel disconnected from your own business. You need to be intentional about tracking the health of your company and making small, steady changes to improve.
Every business and every industry has certain measurements that are key indicators of health and performance. In fact, these numbers are called key performance indicators or KPIs. Large companies – typically those large enough to have their own accounting department – track KPIs religiously and make a practice of reviewing them monthly or weekly to stay on track.
But just because your business is smaller doesn’t mean you can’t utilize KPIs to your advantage. In fact, it often means KPIs will have an even more profound impact on your results.
Common KPIs to track
Every industry has its own KPIs. What’s key for you is what really matters. Here are a few examples of common KPIs for different industries:
Customer lifetime value
In a sales organization, whether online or brick and mortar, lifetime customer value is an important metric. You need to know how much each customer is worth to your company to decide what you’re willing to spend to acquire a new one. You also want to see that lifetime value increase as you benefit from that relationship and continue to sell to your existing customers.
Your profit margins – both gross and net – are key in almost any industry. This is especially true in cases where pricing or costs are fluctuating and you need to ensure that you’re maintaining a certain minimum margin.
You can track your profit margins overall, or for an individual product or service lines. This allows you to see which products are contributing the most to your bottom line and which ones need to be worked on or cut altogether.
Marketing ROI is another KPI that can be useful for many industries. You need to know that your marketing is worthwhile and that you’re using that money in the best possible way.
You can use marketing ROI in a few ways. First, you can compare your ROI to industry standards to make sure you’re getting an acceptable return. Second, you can compare the ROI of each of your marketing channels to see which ones are performing best for you. This allows you to optimize your marketing budget in a calculated way.
Manufacturing companies have some very unique KPIs. Cycle time is a critical metric that tells you how long it takes, on average, to produce one unit of a product. Over time, you can measure your efficiency, your use of resources, and how you stand up against the competition by tracking cycle time, along with other metrics.
Making KPIs work for you
As you can see, KPIs really do depend on your industry. You need to find the metric most important to your companies performance and monitor those over time. But regardless of the variation between industries, there is one thing all KPIs have in common: they need accurate, timely data to be useful.
It doesn’t do any good to measure KPIs if the input numbers are wrong or if they’re outdated. You won’t be able to make good decisions or shift directions in time without good data. So, where do you get that data?
The source of good data
Great data starts with great bookkeeping. To make decisions in real-time, you need numbers that reflect what’s happening right now. That means your books need to be current and kept up-to-date on a daily basis. If your books aren’t caught up until the end of the month, you’re making decisions a month too late!
Not only do you need your books to be timely, you also need them to be accurate and clear. The concept of “garbage in, garbage out” applies to KPIs. If the numbers aren’t accurate, the mistakes will carry over into your KPIs and into your decisions.
In terms of clarity, your books need to reflect the reality you want to measure. For example, if you want to track marketing ROI you need to have each marketing channel separated into different expense and income categories so you can see which is which. If you want to track profits or revenue by sales channels or physical locations, you need your accounts to clearly reflect each channel.
If you’re ready to see your results improve, and watch your business grow, take action today. Talk to your bookkeeper and accountant about identifying KPIs for your business. Make sure your accounting system is set up to track those numbers and schedule regular times to review your progress.