Are you grappling with choosing the right Key Performance Indicators (KPIs) for your small business? Selecting the wrong KPIs can hinder your decision-making and steer you off course. But fear not! This engaging blog post will walk you through a unique 7-step exercise designed specifically for small business owners. By following these steps, you’ll gain clarity and confidence in choosing the right KPIs for your small business that will propel it toward success.
Step 1: Define Your Desired Outcomes by Setting KPIs
To embark on the KPI selection journey, start by identifying a specific and measurable goal you want to achieve. But don’t settle for vague objectives. Instead, adopt the SMART goals framework, ensuring your goals are Specific, Measurable, Achievable, Relevant, and Time-bound. This foundation will guide you toward effective KPI selection.
Action Steps:
- Review your business goals and objectives.
- Choose one specific goal that you want to focus on.
- Ensure that your goal meets the SMART criteria (Specific, Measurable, Achievable, Relevant, Time-bound).
Step 2: Unleash Your Sticky Notes
Equip yourself with sticky notes and unleash your creativity. We actually love using Canva’s whiteboard as a digital way to “sticky-note” here at Strategy Leaders. Write down one KPI on each sticky note, focusing on both financial and non-financial metrics. To expand your options, utilize online resources, consult trade associations, and seek insights from coworkers and industry contacts. Cast a wide net to capture a comprehensive list of potential KPIs. Once you’ve exhausted your ideas, start grouping similar KPIs together.
Action Steps:
- Prepare sticky notes and writing materials.
- Brainstorm and write down potential KPIs related to your chosen goal.
- Explore various sources such as online research, trade associations, coworkers, and industry contacts to generate a comprehensive list.
- Group similar KPIs together for easier evaluation.
Step 3: Rating Importance and Ease of Collection
Now it’s time to evaluate the importance and ease of collecting each KPI. Assess each metric individually and ask yourself:
- How important is this metric in achieving my desired outcome? Rate it on a scale of 1 to 10, considering its impact on your goal and potential to drive success.
- How easy is it to collect this metric? Rate its accessibility, considering factors such as data availability, the time required, and the level of motivation it brings. Assign a score between 1 (hard) and 10 (easy) accordingly.
Action Steps:
- Take each sticky note with a KPI and evaluate its importance and ease of collection individually.
- For importance, consider the impact of the metric on your desired outcome, potential correlations, and its relevance.
- Rate each KPI’s importance on a scale of 1 to 10.
- For ease of collection, assess factors such as data availability, time required, and the level of motivation it brings.
- Rate each KPI’s ease of collection on a scale of 1 to 10.
Step 4: Narrow Down the List
Combine the importance and ease of collection scores and mark the total in the top middle of each sticky note. With a clear understanding of the highest-scoring KPIs, select the top 10 and set aside the rest. This exercise ensures you focus on the most impactful metrics without overwhelming yourself with an excessive number of KPIs.
Action Steps:
- Calculate the total score for each KPI by adding its importance and ease of collection scores.
- Identify the top 10 KPIs with the highest total scores.
- Set aside the remaining KPIs for now, focusing on the selected top 10.
Step 5: Embrace Leading and Lagging Measures
To gain comprehensive insights into your business performance, identify one leading and one lagging measure for each desired outcome. Leading measures serve as predictors of future success while lagging measures reflect past performance. Consider how closely each metric aligns with your goal and identify any blind spots that may exist. By striking a balance between leading and lagging indicators, you’ll gain a holistic view of your business’s progress.
Action Steps:
- Review the top 10 KPIs and determine which ones can serve as leading indicators (predictors) and which ones can serve as lagging indicators (reflective of past performance).
- Match each desired outcome with one leading measure and one lagging measure.
- Consider how closely these indicators align with your goal and identify any potential blind spots.
Step 6: Document Your Tracking Process
Establishing a well-defined tracking process is crucial for seamless KPI management. Document key details such as the data sources for each metric, the frequency of reporting, responsible individuals or teams, and the stakeholders who need access to the reports. This documentation ensures continuity and consistency, allowing for smooth handovers and reliable reporting.
Action Steps:
- Create a document or spreadsheet to outline the tracking process for each KPI.
- Specify the data sources or systems from which you’ll gather the necessary information.
- Determine the frequency of reporting (e.g., weekly, monthly, quarterly).
- Assign responsibility to individuals or teams who will be responsible for collecting and reporting the KPIs.
- Identify the key stakeholders who need access to the reports and ensure they are included in the communication process.
Step 7: Monitor, Report, and Adapt
Recognize that the KPI selection process is an ongoing journey. Monitor and report on the chosen metrics, and be open to refining your selection if a particular metric isn’t providing the expected insights. Adjustments may be necessary as you gain a deeper understanding of your business dynamics and discover more predictive indicators. Remember, this iterative process typically takes 3-6 months to fine-tune, and continuous refinement is essential for maintaining relevant and actionable KPIs.
Action Steps:
- Begin tracking and monitoring the selected KPIs according to your established process.
- Generate regular reports based on the predetermined reporting frequency.
- Analyze the data and insights provided by the KPIs, assessing their relevance and effectiveness.
- Be open to refining your KPI selection if certain metrics do not provide the expected insights or if new metrics emerge as more predictive or relevant.
- Continuously iterate and refine your KPIs based on your evolving understanding of your business and its goals.
Key Takeaways:
- The importance of setting SMART goals: Ensure your goals are Specific, Measurable, Achievable, Relevant, and Time-bound to provide clarity and focus.
- Consider both financial and non-financial KPIs: Look beyond just financial metrics and consider other indicators such as customer data, operational efficiency, and customer satisfaction that contribute to overall business performance.
- Evaluate the importance and ease of collection: Rate each KPI based on its impact on the desired outcome and the ease of collecting the data. Focus on metrics that have a high impact and are relatively easy to track.
- Narrow down your list to the top 10 KPIs: Assign scores to each KPI based on importance and ease of collection, and select the top 10 KPIs that align most closely with your desired outcomes.
- Identify leading and lagging measures: Choose at least one leading indicator that predicts the performance of lagging indicators and identify any blind spots that may require additional metrics for comprehensive measurement.
- Document your KPI tracking process: Clearly define where you will obtain the data, the frequency of reporting, the responsible individuals, and the stakeholders who need to be informed. This ensures consistency, accountability, and smooth handover of the process.
- Monitor, report, and refine: Continuously evaluate and refine your chosen KPIs to ensure they are providing meaningful insights. Adjust and replace metrics that are not delivering the expected results.
- Understand the reporting cadence: Different KPIs may require different reporting frequencies, such as weekly, monthly, quarterly, or annually. Align your reporting cadence with the nature of the metrics and the insights you aim to derive.
Need help getting started – not sure what KPIs to track?
Here is a list of the top 10 KPIs that small businesses should consider tracking:
- Revenue: Measure the total income generated by your business over a specific period, indicating overall financial performance.
- Gross Profit Margin: Calculate the percentage of revenue that remains after deducting the cost of goods sold, providing insight into profitability.
- Customer Acquisition Cost (CAC): Determine the average cost required to acquire a new customer, helping evaluate the efficiency of your marketing and sales efforts.
- Customer Lifetime Value (CLTV): Estimate the total value a customer brings to your business throughout their relationship with you, aiding in understanding customer profitability.
- Conversion Rate: Track the percentage of website visitors, leads, or prospects that convert into customers, indicating the effectiveness of your sales and marketing funnels.
- Customer Churn Rate: Measure the percentage of customers who stop doing business with you over a specific period, reflecting customer retention and satisfaction.
- Inventory Turnover: Calculate how quickly your inventory is sold and replaced within a given timeframe, optimizing inventory management and cash flow.
- Average Order Value (AOV): Determine the average dollar amount spent by customers per order, identifying opportunities to increase sales per transaction.
- Website Traffic: Monitor the number of visitors to your website, providing insights into your online presence and marketing effectiveness.
- Employee Productivity: Measure employee output, such as sales per employee or revenue per employee, to gauge workforce efficiency and effectiveness.
(Remember that choosing the right KPIs for small business may vary depending on your industry, business model, and goals. It’s important to customize your KPI selection to align with your unique business needs.)
As a small business owner or leader, choosing the right Key Performance Indicators (KPIs) for your small business is a crucial step towards achieving your goals and making informed decisions.
By following the 7-step process outlined in this blog, you can navigate through the challenges and pitfalls commonly associated with KPI selection.
Remember to set SMART goals that are specific, measurable, achievable, relevant, and time-bound. Consider both financial and non-financial metrics to gain a comprehensive understanding of your business performance. Evaluate the importance and ease of collecting each KPI, focusing on those with high impact and ease of tracking.
Narrow down your list to the top 10 KPIs that align closely with your desired outcomes. Identify leading and lagging measures, ensuring they provide predictive insights and cover blind spots. Document your KPI tracking process to maintain consistency and accountability.
Be prepared for refinement and adjustments along the way. KPI selection is an iterative process that requires monitoring, reporting, and refining. Stay adaptable and swap out metrics that don’t provide the expected insights.
Lastly, consider the appropriate reporting cadence for your chosen KPIs, whether it’s weekly, monthly, quarterly, or annually. Tailor your reporting to focus on meaningful data that predict future outcomes and reflect the overall health of your business.
By diligently following these steps, you can effectively track their progress, identify areas for improvement, and steer the businesses toward long-term success. Remember, choosing the right KPIs for small business is not a one-time task but an ongoing effort that will empower you to make data-driven decisions and achieve your business goals.
Get in touch with us today to talk about what KPIs could be best for your business and industry!
