The importance of business key performance indicators for small business management
How do you know how well your small business is doing? Do you look at the earnings? Do you look at your sales numbers? Do they measure growth?
Most companies use monthly financial statements, which include sales revenue. Some compare those monthly results with the plan and/or with the results of the previous year. All companies must continue to use that information to run their business. However, all small businesses should also include more meaningful KPIs as part of their measurement process. As a small business owner, managing by measuring performance is an important key to your success.
Develop a set of key performance indicators (KPIs) to track the growth and success of your business. These measures will keep you focused on your business goals. When you write your business plan, be sure to include measurable goals and objectives. Then set up a system that provides you with regular performance feedback.
KPIs can be easily developed and monitored, however each business needs to customize the measurement process to their own business needs.
Here are some KPIs you can consider for your business:
- Number of orders in a day/week/month/year
- Number of estimates in a day/week/month/year
- What kind of ‘win’ ratio does your company enjoy (eg, ‘win’ 15% of all estimates – keep track of this data)?
- How long it takes you to respond to customer inquiries: estimate response times; processing order; time from the placement of the order to the delivery thereof; responsiveness in handling customer complaints; etc?
- How often do you hit your “promise” date (ie the date you promised to deliver the order to your customer)? Analyze the ‘misses’: shipping dates that you do not make. Are they with a product line? Or with a client or type of client? Or with a single employee?
- What kind of employee turnover rate do you have?
- What kind of customer churn rate do you have?
- Percentage of business with your largest customer?
- sales per customer
- Sales per customer per product
- Sales by product
These would be in addition to your regular monthly financials, but consider the KPIs more of a daily or weekly measurement. Set up KPIs to help you see what’s happening in your business right now and to help you forecast for the near term (this week, this month, next month). By tracking some of these statistics on a daily basis, you will begin to develop trend lines that will highlight both the positive and negative aspects of your business growth.
Once you start collecting the data, it becomes much easier to see where the problem lies. If you are a manufacturer and you are always late in delivering to your main customer, find out why. Analyze your process. If you are a distributor and you are always late for the delivery of a certain product, find out why. Is your provider always late? Do you need to carry more inventory of that item? Or is it in both examples because employee turnover is particularly high in the shipping department? Why is shipping turnover high? Are you hiring the right people? Are you underpaying? Does your shipping supervisor have poor people skills?
Developing good performance indicators will help you quickly identify and resolve problems. Once you’ve developed KPIs that are aligned with your business goals, and once you track their performance regularly, you’ll be in a better position to run your business.