I ask this question a lot when I talk to our clients, and the answer varies quite a bit. One of the most common is, what’s a KPI? So let’s start there!
KPI stands for Key Performance Indicator, and it just means some stat that tells you how your business is doing by looking at it over periods of time and comparing them. It’s business school language for what is really a pretty basic concept. But just because it’s basic doesn’t mean it’s not a good idea!
Here are some basic KPIs that business owners could consider looking at:
- Revenue by month
- Profit by month
- Profit as a percent of revenue
- Gross profit
- Cost of Goods Sold as a percent of revenue
- Payroll cost as a percent of revenue
- New leads by month
- Leads to sales conversion ratio
- Advertising spend as a percent of revenue
- And so on
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Just like any kind of stats, you can start high level and then get ridiculously deep if you want to really dive in. Like with baseball, you can consider a batter’s batting average, or you can look at their performance against left-handed pitchers during away games at night during the playoffs.
With business, I find that having ANY is a big improvement over none, and you really don’t have to track a lot or go very deep to start seeing where you can work on improvements.
Which ones should you track? It depends on your business, but generally, you want to look at the things in your business that are your biggest drivers of profit. If you sell goods, keep a close eye on your cost of goods sold value, as this is likely one of your single biggest costs. If you are a service business, then track your labor costs.
Since sales can go up and down, it is usually more effective to track these costs as a percent of the revenue rather than just looking at the dollar value.
Start by looking back over the last year and seeing what the cost of your big line items are as a percent of revenue, and then see what the average comes out to be. From here, you can set a goal to stay at or below your average. Now, when each new month wraps up, you can take a look at how you did.
I’d recommend, at a minimum, looking at your profit percentage and one or two other of your biggest costs each month. Set goals, see how you do, and investigate what is causing any differences each month and what you can do to fix them or at least understand what caused them.
Maybe you had a big one time expense this month, and that caused the profit to dip. That’s OK.
It’s when you don’t know what is causing it and you can’t see why things aren’t going as planned, it’s time to worry a bit. Not tracking this at all can leave you blissfully unaware right up until you’ve got an unavoidable disaster on your hands, it’s too late to fix.
In my experience, most business owners don’t look at these. But if you start, then you start to see how helpful it is, and you look forward to seeing them and seeing yourself improve and quickly fixing things that are hurting your numbers. You go from “not a numbers person” to a bit obsessed- but in a good way.
If you aren’t doing this yet, give it a try. If you are, try adding a few more stats and see how much additional helpful data it gives you.
Often, the easiest way to run a better business really is easy to do and not the complicated and expensive high-ticket consulting project many people get pitched!