Understanding Key Performance Indicators (KPIs) and Using Them to Fast-Track Business Growth

Sean Lund-Brown

As important as it is to trust your instincts in business, it can be even more important to follow the data. When starting a business, there are a lot of responsibilities and considerations to make to help grow your new company. Business owners have made these decisions based on feelings or instincts in the past.

But data can show how much money you are making, what kinds of customers you attract, how much your average customer spends, etc. This data can be tracked and shown using key performance indicators.

What is a key performance indicator (KPI)?

A Key Performance Indicator helps a company make the best business decisions. In practice, this includes data collection and conversion, ultimately acting on what the evidence has shown. A business can use KPIs for various reasons, but predominantly they are used to improve processes and increase efficiency.

Key performance indicators are important indicators of progress as they are often used to focus on operational and strategic improvements. KPIs can create an analytical basis for decision-making as KPIs provide feedback for a business using raw numbers and statistics.

KPI tracking utilizes tools and techniques to monitor business metrics. Measuring these KPIs includes getting data and converting it into measurable metrics. Key performance indicators can offer specific insights into operational effectiveness. KPIs are customizable depending on a business’ needs.

However, KPI tracking is not just about collecting data. It is important to put the metrics in context. This can help a business determine what, if anything, should be improved or changed.

What is the difference between key performance indicators and objectives and key results (OKRs)?

OKRs are objectives and key results. Key performance indicators and OKRs have a lot of similarities, but the primary difference is the scope. While KPIs are set to assess goals based on previous data, OKRs are typically implemented for new goals. OKRs have been used more commonly in recent years.

The goals set for OKRs are supposed to be hard to reach but obtainable, so OKRs are motivational targets set to inspire employees. Goals for key performance indicators are far more realistic. There are a lot of common elements between OKRs and KPIs, but for this article, the focus will be on KPIs.

Important terminology related to key performance indicators

When working with KPIs, there are some key terms that you will want to know.

Lagging and leading indicators

Lagging and leading indicators and two different kinds of KPIs. Leading indicators are predictive, looking towards the future, while lagging indicators are financial signs that become clear after a large change has occurred. You will hear these terms quite often associated with key performance indicators.

Inputs and outputs

Other common terms you need to know are inputs and outputs. As an example, think of a pizza and the pizza chef. Inputs might include cheese, dough, sauce, pepperoni, and the chef’s labor to create a pizza. Meanwhile, outputs measure the work completed. In other words, inputs measure what goes into a process, while outputs measure what comes out.

Process measures

Process measures (sometimes called activity measures) focus on the process itself. The efficiency, quality, and consistency are considered. This can include tools and equipment.

Project measure

A final term you may see when discussing key performance indicators is a project measure. Project measures determine the effectiveness of a new project or campaign. For example, if a pizza restaurant sends out mailers, project measures will help determine how much business this project brought in. Ultimately, this can help a business decide if a project was worth the investment.

How can marketers use key performance indicators?

Key performance indicators are measured, reported, and converted with charts and dashboards. Your employees should easily understand these charts and dashboards. Keep things as straightforward as possible so you can use your KPI data to improve your business processes and practices. Depending on your unique needs, key performance indicators can be very general or extremely specific.

For analytics overall, KPI tracking helps organizations quantify progress and see where they could make improvements. KPIs are used to determine employee effectiveness (particularly in the sales industry) and help determine pricing.

Why are key performance indicators important to your business?

Think of your business as a crew of sailors in the ocean with KPIs helping steer the ship. You must know the wind direction, so your ship stays on course. The same is true with key performance indicators. Knowing as much information as possible about your business will allow you to direct your business better.

Your business needs KPIs for many reasons. KPIs allow businesses to adjust on the fly with data-driven solutions. KPIs allow teams to be held accountable for successes and shortcomings. KPIs help keep teams working together and moving in the same direction. Finally, key performance indicators allow management to take a realistic look at the financial health of your organization or business, including risk management and financial indicators.

Keep your key performance indicators specific

There are two crucial things to consider when determining key performance indicators to use within your company. First, the KPI must relate directly to the business’ overall model and goals. If the KPIs are not directly contributing to helping your company achieve its goals, you are not spending your time wisely.

You must remember that KPIs should be as specific and relevant as possible. For example, a key performance indicator measuring “leads from Facebook” would be vastly more useful than something more general, such as “leads from the internet.” These indicators should also be relevant and current to your business. Narrow the focus of your KPIs so that they are efficient, clear, and helpful.

What are the different types of key performance indicators?

Remember that different KPIs will be beneficial for different kinds of businesses. Each company is unique and has different needs and goals. Generally, KPIs fall into three major categories. Key performance indicators are usually strategic, operational, or (functional) units.

Strategic and functional key performance indicators

Strategic KPIs monitor the big picture, or organizational goals. Strategic KPIs might include revenue, market share, or return on investment. Meanwhile, unit KPIs are connected to individual segments or functions within your organization. Gross profit margin and return on assets are two examples of unit (or functional unit) KPIs.

Operational key performance indicators

Operational key performance indicators are generally set over a shorter period. Often these are measured over days or weeks rather than months or years. Operational KPIs include regional sales, cost per acquisition, and other metrics focused on organizational efficiency. Operational key performance indicators are designed to show a business owner or manager how they can be more efficient.

Are your key performance indicators leading or lagging?

KPIs are usually considered to be either leading indicators or lagging indicators. These indicators are most often either one or the other. Leading indicators are looking to the future, trying to predict market changes or trends.

Lagging indicators measure performance in the aftermath of a change. A lagging indicator might include the unemployment rate, corporate profits, and labor costs per unit.

What are common key performance indicators?

While every business is different, many businesses use the same key performance indicators.

Revenue per client

Revenue per client is one metric that many businesses choose to use. This measure of productivity can be calculated by dividing the annual revenue from your business by the number of clients. This can determine whether customers are returning to your business in many cases. However, there is a more specific key performance indicator for that purpose.

Retention rate

Retention rate can be very important for fledgling businesses. Your customers must have a positive experience to return in the future. This might be the most important of our common KPIs in many ways. Your retention rate is crucial to your business’ long-term sustained success.

Profit margin

Your business’ profit margin is among the most commonly used key performance indicators. A business cannot continue to run unless it can generate a profit. Profit margin can show a business owner or manager where money is going, which expenses need to be cut, and even what products and services are priced appropriately.

Link clicks

Link clicks are a popular type of KPI. Social media managers and the like often use this metric to determine how often links are clicked. This can be on your business website, social media, emails, etc.

Additional common key performance indicators

Average order value, new customers, cost per lead, employee turnover rate, cash flow, average response time, and total reach are other commonly used KPIs. Key performance indicators can be as specific or as general as desired; it is important to align with its goals.

Choose appropriate key performance indicators for your unique circumstance

Key performance indicators are important metrics, but they will not all be useful for your particular situation. Choose your KPIs based on your business goals. Your business goals should be measurable, attainable, time-sensitive, and actionable. If goals are measurable and actionable, business owners might easily create their KPI dashboards.

An effective key performance indicator should allow you to track factors related to your goal.

Remember that all businesses are different. For example, a brick and mortar store may need to consider sales per square foot, loss by theft, foot traffic, and more. None of these indicators would be useful for an online business. An online business might focus instead on social media shares, participation in a mailing list, and average order value.

To reiterate, you should set your chosen KPIs based on your business’s overall philosophy and goals. If your goal is to increase sales, consider a sales-based key performance indicator. If your goal is to increase traffic on your website, consider KPI factors of engagement. Your KPI should fall directly in line with your business goals.

What is important when determining the right key performance indicators?

To determine the right key performance indicators for your business, you must first determine your audience. Link clicks might be a useful metric for a social media or website manager, but this will not be useful for the human resources department in most cases.

Secondly, include specific goals. Your goals should also be realistic, attainable, and measurable (using other KPIs). Measure key performance indicators over reasonable time frames for your data to truly show trends.

Lastly, improve and evolve your KPIs. If a key performance indicator does not seem useful, change or remove it. You do not want to inundate your employees with unhelpful overloads of information. Visualizations can provide deep insight and are often a better way of communicating important information.

Key performance indicators that are worth consideration

Source: Think With Google

Though, of course, it is up to you and your company, below are seven possible indicators that small business owners may find valuable. Many of these are used across multiple industries.

Revenue growth rate

The revenue growth rate is a KPI referring to an increase (or decrease) in income or sales growth. Calculating this key performance indicator is straightforward. First, find the total annual revenue for the current year. Then, divide that income by the previous year to determine the growth rate. This can indicate whether your company is growing, shrinking, or staying the same.

Cash flow forecast

Cash flow forecast is another KPI used in many circumstances. These forecasts allow a business to assess if sales and margins are suitable. As a small business, it can be critical to see these trends as soon as possible.

To calculate a cash flow forecast, add the total cash your business has (in reserve) to the predicted cash value for the next month. After, subtract the projected cash out for the next month.

The cash flow forecast can be valuable if you perform them periodically. This allows business owners to identify issues as early as possible and make adjustments. Cash flow forecasts also enable businesses to predict surpluses or shortages in the future. This key performance indicator can also come in handy when planning for tax season.

Inventory turnover

Inventory turnover can be particularly useful for small businesses with limited shelf space. This key performance indicator measures the number of units sold in a set period. This can reveal how quickly your business moves goods.

To calculate this, simply add the cost of the sold inventory for the year, then divide that by the value of your remaining inventory. Typically, businesses want to have a high turnover rate. This indicates your product is being sold at an appropriate price and demand for your product (or service).

Funnel drop-off rate

Another major KPI is the funnel drop-off rate. This indicator assesses how many potential customers abandon your “sales funnel” before completion. In other words, it indicates how many potential customers may have gotten away. This key performance indicator can be used effectively online and in sales scenarios.

To calculate funnel drop-off rate, determine the number of visitors who reached a certain step in your funnel (check-out section of your website, for example). Take this number and divide it from the specific conversation step to find what customers you may have missed.

A funnel drop-off rate can help companies identify problems in their processes and boost sales. As more and more business is done online, the funnel drop-off rate can be a valuable key performance indicator for a growing business.

Relative market share

A KPI you may have heard about is the relative market share. This key performance indicator indicates what percent of a given market your company commands. This is an external metric, making it somewhat unique. Relative market share can show how you and your business perform compared to your competitors.

After calculating the relative market share, you and your team could make adjustments and improvements to your business in the long run. This metric can also be useful for identifying competitors and determining how they are taking a portion of the market share.

Gross profit margin

A business will not be successful if it spends more than what it is bringing in. The gross profit margin is a percentage of sales that indicates total profit (compared with revenue). No business can thrive if losing money on sales (or not making enough).

To calculate gross profit margin:

● Divide your gross profit amount by your sales.

● Divide that by your amount of sales to determine how much of your gross profit margin makes up your total sales.

● Multiply that number by 100 to see your gross profit margin as a percentage of sales.

The gross profit margin is a useful metric to use over long periods because it allows you to see how much money you spend on suppliers. As time goes on and your business grows, your gross profit margin should increase.

However, a decrease in gross profit margin as a percentage of sales may show that a company spends too much on supplies. The most direct remedy to this is to find a new supplier at a more beneficial rate or to increase prices on your products.

Accounts payable turnover

The accounts payable turnover measures the rate at which a business pays for goods and services (within a specific time frame). To find this indicator, add the cost of total supplier purchases and divide by accounts payable. After determining how much your company spends on supplies, you will decide if you need to take steps to reduce your spending.

Key performance indicators to track sales

In any sort of a sales-driven business, it is important to determine where sales are coming from to improve business practices. Here, we will look through some unique sales key performance indicators that can help you:

● Improve your business model

● Incentivize associates

● Grow your brand

In the sales industry, many of these metrics may be worth tracking. Remember, as discussed earlier, these are lagging indicators. This means they are measuring output, not the input.

Win rate

A win rate is the percent of opportunities that the organization won. In other words, it is like a batting average for sales. Often, companies are not satisfied with only tracking their overall win rate. You can break down a win rate more specifically to track employee performance. Win rate by opportunity value also considers the potential value of the opportunity.

To continue to develop your sales associates and teams, consider win rate by contact method as an indicator. If your associates are reaching out on various platforms (cold calls, Facebook, trade shows, referrals, LinkedIn), it can be valuable to them and you to see which of these platforms requires the most resources.

Average retention

Average retention rate can be beneficial in certain sales industries. A high retention rate will indicate your company is doing well to keep customers it has worked to accrue. However, your high retention rate may be due to underpricing or other factors, so make sure to keep all of your indicators in mind.

A low retention rate is rarely good. This demonstrates that customers do not see the value in your business.

Additional sales-driven key performance indicators

There are many other useful KPIs to track sales and sales growth. These include:

● Quote to close ratio

● Usage rate

● Dollars paid to the sales team

● Revenue generated

● Team morale

Remember that with your small business, focus your key performance indicators on the most important things for your company’s goals.

How do you define a key performance indicator for your company?

Effective KPIs typically are different for different industries. However, all companies have unique needs. Depending on company philosophy, needs, and strategy, a large variety of KPIs might suit your particular situation.

Your first step in choosing appropriate key performance indicators involves setting goals. For example, your goal may be to increase sales, lower costs, or improve efficiency. It may take some time, but you want to make sure to choose a KPI that will give insightful results. Remember to set achievable goals; KPIs are measurable and useful data, not ambitious, hard-to-reach goals.

Primary steps in the key performance indicator process

While every situation is unique, you can expect some things when setting goals, establishing KPIs, and evaluating them. Remember, KPI data collection and conversion is an ongoing project.

Step 1

Identify a set of key performance indicators applicable to your business. This could also be for a department or unit within your business. Ask for input from department heads, as they will track data and implement future changes.

Step 2

Create an easy-to-use way to measure and chronicle the data. KPI results can be displayed using graphs, scorecards, or dashboards.

Step 3

Evaluate the data from the key performance indicators. Determine how well (or poorly) your company’s needs are being met. Remember that the focus of KPIs is to learn ways to improve your business. Be deliberate and thoughtful when evaluating your key performance indicator data.

Step 4

Change processes and strategies to improve performance. Based on your key performance indicator data, think about:

● Changes that need to be made

● Where you see positive successes

● Where your potential shortcomings lie

Then act. Make changes and record the changes you see.

Step 5

The last step is to assess if your KPI goals are still in alignment with your overall goals for your company or department. If they are not, consider changing them to suit your changing needs.

Remember that the KPI process can be an ongoing one.

To use this data beneficially and advantageously, be sure to continue to improve your key performance indicator process. This can help your business grow more quickly.

Key performance indicator development

It’s easy to get inundated with an excess of data. You may think it is a good idea to measure everything. However, it is important to focus on measuring only KPIs to help you achieve your business goals. This is called strategic focus, and it is of the utmost importance when it comes to KPIs.

How will you implement your chosen key performance indicator?

First, define how you might implement your KPIs. Ask your employees what they are looking for in KPIs and determine how you will use them. This can help you choose relevant, valuable KPIs that will improve your business practices over time.

If your KPIs are not related to your business goals, they may be useless. Remember that every KPI you use should tie back in some way to your overall business goal.

Does your chosen key performance indicator meet your criteria for growth?

KPIs should meet a set of criteria. They should be:

● Specific

● Measurable

● Attainable

● Realistic

● Time-sensitive

An example of this kind of indicator might be “Increase sales volume by 6% in the next two years.” It’s also important to keep key performance indicators clear and easy to understand. Your employees should easily determine the purpose and vision behind the data.

Consider training employees in data literacy. This will enable employees the autonomy to make data-based decisions for the good of their department (and the company overall).

Evaluate your chosen key performance indicators

Be willing to change and adjust. As the needs of your business change, you may need to consider changes to your key performance indicators. Some indicators may no longer be relevant, or the overall goals need to be adjusted.

When necessary, have a plan to make changes to your KPIs. Remember that the purpose of KPIs is to improve efficiency, so you must remain flexible.

Do not inundate your employees with an excess of data and numbers. Key performance indicator data has become far easier to measure, track, and communicate over recent years, but that does not mean that you should overdo it. Focus on your company’s most important targets and goals.

What are some ways to track key performance indicators?

KPIs and tracking play an important role in fine-tuning an organization in today's technology-driven world. KPIs help organizations orient themselves for success.

The first step to monitor your company’s KPIs is to start a KPI library.

Start with pertinent KPIs that will be most important for your organization. KPIs are often used for sales. Sales can be tracked more easily than some other aspects of a business because it is measurable.

Your business’ KPIs should be relevant for your company’s goals

You can use key performance indicators to track converted leads, sales growth, monthly sales, and more. This can help your organization understand how it is attracting and retaining customers. Furthermore, tracking these KPIs will help provide insight into what can be improved and how.

Make sure to use key performance indicators with appropriate scope, neither too general nor too specific. You want to use KPIs that are appropriate for your business. It may be valuable to determine where your customers hear about you if you have a new business. If you have a long-running business, improving processes and becoming more efficient may be more important.

KPIs are crucial for helping new businesses grow and flourish. Remember that each industry is unique and each business even more so. Choose key performance indicators that will help you expand your reach and increase your sales. When getting started, choose only a few indicators to implement and measure. This will allow you and your company to focus on your goals.

Smith.ai’s services can help you improve your KPIs and overall business performance

Getting started with key performance indicators can seem overwhelming. There are certainly many of these indicators, and all the data can often be confusing. Smith.ai can assist you while you focus on your business’ growth using KPIs.

Our team offers a range of services that allow businesses to connect with leads and prospective clients. You could delegate your Facebook message answering, warm call transfers, web chat services, and after-hours call answering to us. You can achieve your KPIs by utilizing our services that funnel your leads to conversion.

Your staff’s talents could shine in other areas; you do not need to spend your time with outbound call-backs and after-hours web chats. Our team can apply our experience and training to assist you. We have bilingual agents and free spam blocking that can save you time.

You can call us (650) 727-6484 or email us at hello@smith.ai to discuss our pricing and our 14-day, money-back guarantee. Set up a free 30-minute sales consultation with us today to fast-track your business’ growth.

Sean Lund-Brown

Sean Lund-Brown is a current Marketing Assistant for Smith.ai. A graduate from Metropolitan State University of Denver, Sean graduated with a BA in Music and an individualized degree in Teaching Vocal Pedagogy.

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