This much is clear: defining Key Performance Indicators (KPIs) for your business is essential. What is less clear: identifying which performance indicators are indeed key for your particular business. There are many useful KPIs, and we believe there is one KPI in particular that will benefit every business owner, regardless of industry, location, or size.
The most successful businesses track and regularly review KPIs, but not all KPIs are critical to every business. Track the KPIs that report on important operations of your business.
What are your business objectives? Focus on KPIs that indicate how effectively your business is achieving those objectives. Track your KPIs for both real-time feedback as well as predictive indicators of future performance.
What Makes a Useful KPI?
First, KPIs are only useful if they are relevant to your business. (Remember, not all KPIs are critical to every business.) Assuming that the KPI is relevant to your business objectives, useful KPIs share some common characteristics:
Useful KPIs are not based on subjective opinions. Good KPIs are objective and evidence-based, informing sound decision-making and supporting reliable conclusions.
This may seem obvious, but ensure that what you’re trying to measure can actually be measured and quantified. Useful KPIs are not abstract concepts, so be sure you can measure what you intend to measure.
Good KPIs will become even more useful over time, but only when they can offer a helpful comparison to past results. Tracking and comparing changes in KPIs consistently over regular intervals will provide valuable insight.
Examples of Common KPIs by Business Function
- Quantities produced
- Material cost per unit
- Customer satisfaction survey results
- Waste factors
- Quality factors
- Employee turnover
- Gross profit margin
- Accounts receivable and days outstanding
- Cash on hand
- Line of credit balance
- New customers
- Recurring revenue
- Lost customers
- Sales pipeline
- Percent of sales going to the top customers
- Website traffic
- Marketing generated leads
- Online search engine results and page rank
What is the Most Important KPI?
Although every business is different, in my 16 years as an entrepreneur and subsequent years working alongside business owners in a wide variety of businesses, I believe one particular KPI is universally helpful for any business: a comprehensive business valuation.
In nearly any case, a business valuation completed every 6 months is a more important and useful KPI than any other. Let’s hold this up to our aforementioned standards for what makes a useful KPI:
- Relevant: A custom business valuation will reflect how effectively a business is achieving any number of its particular objectives.
- Objective: A professional business valuation is not biased by opinion or sentiment. While it does involve a thorough analysis of your business, it is an objective analysis based on data.
- Measurable: Measuring what is measurable is the hallmark of a thorough and accurate business valuation.
- Comparable: A consistent business valuation at standard six-month intervals will provide helpful comparisons, allowing you to gauge performance changes over time and make well-informed predictions.
Useful for every business, a valuation offers a big picture view of the health of a business and serves to provide insight into opportunities for improving that health and value. If you’d like to begin incorporating this KPI for your business, contact us today to begin with a complimentary business valuation.