Key Performance Indicators for Small Businesses
Key Performance Indicators (KPI's) are commonly implemented and used in many medium size and large size companies. They can be just as effective in guiding a start-up or a small business during the various phases of the business life cycle. In simple words, KPI's are nothing more than the gauges that you need to use to effectively manage and grow your business, similar to the gauges that you use to drive a car, e.g. the gauges for fuel, speed, oil, temperature, etc. Without these gauges you probably would not be able to drive a car for a long period without having an accident or running out of gas. Similarly, every business owner needs to have their own gauges to manage and grow their business.
All businesses go through a life cycle from start-up, growth, maturity, decline, and rebirth or death. KPI's not only vary from industry to industry but they also vary from where the company is in its life cycle. At the early stages, the company is probably more concerned with reaching critical mass to cover the variable expenses. On the other hand, a company in a mature stage is probably more concerned with recreating itself by looking for new and fresh growth areas.
The focus of this post in on KPI's for small businesses at the start-up phase. KPI's are typically divided into these 3 buckets: Financial, Operational and External. At the start-up phase, businesses should focus on these KPI's:
1. Financial: Cash Usage means how much cash is your business generating from sales vs. how much cash you are using to run the business. Obviously, at the beginning, a lot of cash is going out the door to get the business started, but once you are open for business, you want to track how much cash you are burning (meaning, outflow>inflow). You should also know how many months of cash reserves you have. Depending on the business model, you many need 3 months to even 12 months before you start generating cash (meaning inflow>outflow). Keep in mind that running out of cash is one the top reasons of why new businesses fail at the beginning. So this is probably one of the most important gauges for your business.
Another set of Financial KPI’s are your margins (gross margins and operating margins). Tracking and managing these figures will help you adjust your prices and your expenses accordingly. For instance, if your gross margin is 50% but your competitors are at 75% (all things being equal), you probably need to consider raising your prices at some point in time.
2. Operational: Achieving critical mass is one of the most important things for any new venture. This is the point where the business is self-sustainable. In other words, the business has enough customers that it can withstand the down months if the business is subject to seasonality or it can sustain one-time hick-ups that may happen as part of growing and learning.
Number of customers or number of customer orders, or orders/customers are examples of operational KPI’s. The right KPI depends on your industry. In the restaurant business, you certainly want to keep track of number of customers by day and the average bill per customer. Tracking this will help you understand what days of the week or what months of the year you need to have some promotions in order to increase traffic. On the other hand, if the average bill is too low, perhaps you need to promote ad-on’s on your menu.
If you have a business that sells to the top of the market, like luxury vehicles or custom wedding invitations, you also want to keep track of closing rate. Meaning how many orders you took over a given period of time relative to how many customers came to your store during the same period of time. Again, these figures will vary from industry to industry.
3. External: The most important KPI’s in this segment are the ones designed to “listen to the customer”, for instance customer reviews/opinions, or complaints. As an alternative you may also want to keep track of customer error rates. Depending on your business these are the errors that impact customer experience. For instance, an online retailer can use: incorrect customer shipments or customer shipments not delivered.
These KPI’s will help you make adjustments to your process along the way. If you are getting consistent feedback that the service level is not good, you need to address the necessary process issues head on in order to make sure that customers come back.
The main purpose of implementing KPI's is to objectively make changes to your process, people or your technology in order to grow the business. The most important thing is to make changes based on data as opposed to "gut feelings". Don’t worry about being perfect at the beginning because KPI’s will evolve with time as you learn more about the business or as you face different challenges along the way. For example, today you may be launching a new product with limited competition, but tomorrow you may have 3 or 4 competitors that are eroding your margin; therefore, keeping track of your pricing relative to your competitors may be an indicator that you need to implement in the future.
Remember, you can’t manage what you don’t measure.
Ricardo Lowe, CPA RLowe Consulting