How to Establish KPIs for Your Business: The Key to Improved Financial Health
KPIs are indicators that help you track the progress of your business goals. They can be financial or non-financial measures. Financial KPIs might include gross margin, net profit, and return on investment (ROI). Non-financial KPIs might include customer satisfaction scores, employee turnover rates, and leads brought in from an opt-in.
The first step in establishing your KPIs is defining your goals. Yes, as a business owner one of your goals is higher profits, but it is time to think deeper. If your goal is 50 people in your new group coaching program, then you need to understand your conversion rates to figure out how many sales calls or leads you need to be bringing in to hit that.
Maybe you are planning to launch a coaching offer and in order to do that you need to establish a strong email or text list (audience acquisition). Therefore, we would want to be tracking the growth of this email list over time and use this to predict launch success. Or, for example, let's say you are not sure why profit is dropping. You would have to examine whether costs are rising, revenue is declining, or both.
Too many entrepreneurs are winging it or going with their gut when it comes to making business decisions. While spreadsheets may not excite you, the information you can glean from data-driven metrics can be a game changer for your business. These metrics also help guide you in how to spend your time. If you are spending a large amount of time marketing an offer that does not have a solid profit margin, then this is time that could be spent making more money for your business.
KPIs are made up of leading and lagging indicators. Leading indicators are the types of measurements that explain the "why" behind the lagging indicators. For example, if a company's revenue is declining, that is a lagging indicator. It tells us what happened already. A leading indicator would be customer conversion rates, leads coming in, etc. Instead of saying "you need to make more sales," your CFO should be saying, "can we get you on a couple of podcasts and speaking engagements to promote more?" Driving specific call to action is a key element of your KPIs.
Once you have established KPIs, you need to track them on a regular basis. This can be done manually or with software. Many accounting software programs now offer dashboard features that make tracking KPIs easy. As a fractional CFO, we also have these dashboards custom to every client. You should also review your KPIs with your accountant or CFO on a regular basis to ensure that they are still relevant and to identify any areas of improvement. These metrics can change based on the seasons and changing focus areas of your business.
By establishing KPIs for your business, you will be able to track your progress and identify any areas where improvements need to be made. This is the key to improved financial health for your business. If you need help getting started, contact a CPA, CFO or business coach who can assist you in setting up KPIs.