10 must-know KPIs for small businesses.
There are thousands of KPIs that can be used to measure business performance. These KPIs differ and depend on the nature of your business, your business goals, and the current market and consumer demands. Establishing clear goals will give you the insight you need to plan your strategy. Many entrepreneurs assume that the strategy will either work or it won’t, so why are KPIs important?
The significance of KPIs lies in what they tell you
KPIs are like the “check engine” light on a car, except that they don’t only tell when something is wrong, they also tell what you are doing well and how it is impacting your business. This enables you to invest more time and resources into avenues that are yielding positive results. When working with KPIs, it is important to note that they are generally split into two kinds of indicators:
- lead indicators, which measure inputs to predict what will happen in the future
- lag indicators, which measure what has already happened.
KPIs relevant for measuring one type of business might not be relevant for measuring another, particularly the lead indicators. Lead indicators take into consideration your target audience, the market and economic factors affecting your target audience, and other external factors that will affect your sales and other revenue-generating activities. Professional services, for example, like lawyers, real estate agents and healthcare providers will have specific lead indicators that apply to their industry.
“KPIs differ and depend on the nature of your business, your business goals, and the current market.”
Lag indicators for professional services are also unique to the industry you’re dealing with. Not all businesses have the same running costs, the same requirements for collaboration from teams, or the same running expenses and assets.
The top 10 must-know lag and lead indicators for professional services businesses include:
1. Website traffic – lead indicator. The number of visitors who find your website on a monthly basis indicates how easily your services are found and how likely they are to be utilised. Look at reporting that also indicates your lead to sales conversion rates, to pinpoint at which point you are failing to turn visitors into buyers.
2. Meetings with referral partners – lead indicator. Meetings with referral partners can help you identify ways to optimise your repeat-business and client satisfaction rates.
3. Number of meetings/calls with prospects – lead indicator. Conversions happen when you have prospects or leads. By increasing the number of leads and prospects you have, you can improve the number of sales you will make. Your conversion rates will give you an idea of how many leads you need to generate in order to make your sales targets.
4. Number of engagement letters sent – lead indicator. Following from the previous point, when you understand how many leads and prospects you need in order to achieve your sales goals, you can refine that further by looking at how many engagement letters and other activities you need to embark on in order to get the prospects.
5. Time to complete the job and bill – lead indicator. What are your overheads per job? This is unique to each business. You need to consider the resources required to complete the job – including the cost of having the staff present for that time period – and calculate how long it took you to complete the job. Add into that any additional costs, like repeat billing, collecting debts and the phone calls required to finally receive payment.
6. Employee productivity levels – lag indicator. This is calculated using fairly simple maths. You calculate the amount billed for a project and divide it by the amount of time it has taken to complete the project. The higher the number, the better. This is a driver of revenue, which means it is ultimately going to indicate what your profit generation and cashflow look like.
7. Profit – lag indicator. This is probably surprising, but forget revenue, and instead think of the saying “revenue is for vanity, profit is for sanity, and cash flow is a necessity”. Focusing on revenue doesn’t add value to the exercise.
8. Current ratio – lag indicator. This is calculated based on your current circumstances and includes your current assets (these being cash and debtors) divided by your current liabilities (these being trade creditors, tax debts, loan and finance repayments due in the next 12 months). This number should always be more than one. A number below one indicates that the business is likely trading while insolvent (this means it can’t pay its debtors as and when due) and there is a problem. This is a measure for cash flow.
9. Debtor days – lag indicator. Calculate how long it takes debtors to get paid. Shortening the time will improve your cash flow KPI. You can calculate your debtor days as follows: accounts receivable/annual credit sales divided by 365 days.
10. KPIs to measure your team’s job satisfaction. Measuring employee productivity gives you a good idea of how well your teams are serving your business. However, it has to work both ways if you want to optimise that number and achieve the best possible productivity levels (ultimately improving your cash flow rates). You need to stay in touch with your teams to ascertain their job satisfaction levels, find ways to reduce stress levels in the workplace, and help the teams form positive working relationships.
The importance of a business with heart
KPIs don’t only apply to the data you can measure in graphs and on paper. We are entering a time where workplaces are becoming environments where people should thrive, not only come in to serve the needs of the company at the cost of their happiness. It is necessary to have a separate set of KPIs for the business which measure how much the business positively affects the greater community and those it is directly in contact with – clients, contractors and employees.
Research indicates that a team that is engaged, energetic and enthusiastic will always work harder, faster and better. In fact, this is such an important element in the success of a business, you can consider it a major part of your business’s KPIs – measuring how happy and engaged your team is.
For high-performing organisations, you can measure wellbeing through the creation of a survey to gauge employee sentiment across a number of areas. The higher the collective wellbeing of the team, the higher the collective output of the team. Measurements should be taken frequently. Areas to look at to gauge wellness could include:
- energy levels
- job satisfaction.
KPIs are the building blocks for your strategies
Knowing what your KPIs are and having measured them concludes the first step. Understanding your findings, interpreting them correctly, and using that insight to craft a strategy (or adapt your existing strategy) is the real work. This is what is going to drive your business toward its goals, rather than simply hoping for better results.
It’s not always easy to ascertain whether or not you are on the most efficient path to success. You may be an authority in your own field, but understanding these KPIs and working them into a plan is easier for an accountant, as these are the parameters they’re familiar with.
This article first appeared in issue 33 of the Inside Small Business quarterly magazine