Key Performance Indicators 101: Understanding and Implementing KPIs

Key Performance Indicators

Using Key Performance Indicators in Your Business Will:

  • Provide historical data that can be referenced anytime.

  • Define metrics that can be tracked to answer questions that lead to your success.

  • Allow you to make insightful decisions that propel you towards reaching your goals.

What Are Key Performance Indicators?

Key Performance Indicators, or KPIs for short, are quantifiable measurements that communicate important data from which insights can be gained.  Your company may use KPIs to evaluate your success of a particular activity.

Beyond simply tracking your performance on an activity, the KPIs should also be able to inform you about how other areas of your business will be impacted by that activity.  For example, is your monthly revenue directly related to the number of billable hours your team completes?  If so, a KPI that you absolutely must be tracking and analyzing on a minimum of a weekly basis is team billable hour performance.

By identifying the KPIs that offer the greatest insight into the performance of your business, and beginning to track them consistently, you’ll be able to see exactly what’s working well, what’s working poorly, and then make strategic decisions on which levers to pull in order to improve results.

“You should be establishing which numbers you’ll use as your KPIs.  It’s about finding out what key measurements your specific company will need to look at and set goals with.”

In her book, The Eventual Millionaire, Jaime Tardy says, “You should be establishing which numbers you’ll use as your KPIs.  It’s about finding out what key measurements your specific company will need to look at and set goals with.”

You can think of KPIs as the scorecard of your business.  A comparison can be made to baseball.  Baseball is a game of statistics.  There is nearly endless data available on the performance of a player or team, and that data highly impacts the perceived ability and success of those players and teams.  If batting average, home runs, wins, and losses were not systematically tracked, team managers and owners would have no way of knowing which players perform best, which players should be utilized in key game situations, which are constantly evolving.  Without the benefit of the data, the game would be chaos with no strategy.  Similarly, without knowing your KPIs, you have not information to base your decisions on, other than gut instinct.

3 Characteristics of Key Performance Indicators

Once you’ve identified the general statistic that will be useful for your business to track, you next must define the specific Key Performance Indicator.  In order to be useful KPIs must be:

  • Reflective of Your Goals
  • Key to Your Success
  • Quantifiable (Measurable)

Reflective of Your Goals

Is your goal to increase revenue?  Increase sales volume per customer?  Decrease cost of goods sold?  Reach a specific target for annual sales quantity?  Whatever the goal may be, the KPIs that you choose to track must be measuring activities that lead to those goals being reached.

To illustrate this point, if your goal is to increase sales volume per customer, your KPI should not be tracking expenses in some form, because expenses have no relation to sales volume per customer.  A more appropriate KPI would be a metric that relates to up-selling projects, or increasing the frequency that you serve each customer.

Key to Your Success

There really are endless metrics that you can track in your business, from which team member contributes to the highest amount of revenue to how many rolls of toilet paper your staff goes through per month.  Of course, some are much more important to the success of your business.  I highly doubt that decreasing or increasing the toilet paper consumption will boost your bottom line.

Rather than simply being a metric in your business, a Key Performance Indicator must provide insight into an activity that is key to your success.  Success is defined as different things to different businesses and different people, so first determine your definition of success.  Then, choose the activities that are the biggest contributors and fuel to that success.

Quantifiable (Measurable)

Many of the things that drive your business are unquantifiable, meaning unable to be measured.  For example, the passion and commitment each of your team members has for their job and your company greatly impacts your success, but it’s extremely difficult, if not impossible, to measure passion.

Instead, your Key Performance Indicators should focus on measurable metrics, such as net profit, customer acquisition rate, customer retention, billable hours, working capital, accounts receivable, and other quantifiable activities.  The quantifications can come in the form of percentages, sums, averages, or other number values.

Which KPIs are Important to Your Business?

Understanding the importance of having Key Performance Indicators in your business, the question becomes how to choose the right ones to track.  Every business is different, and therefore every business is going to have different KPIs that are most important to them.  In order to know which will be the most useful to you, ask yourself what activity most leads to the success of your business?

Is the number of Tweets you send each month important to know?  Maybe.  If your Tweets lead to website visitors, which in turn generate sales or client leads, then tracking the number of Tweets you send may be very beneficial.

What about average revenue per billable hour?  Would it be beneficial for you to know on a weekly or monthly basis how much money your company is producing per hour worked?  If you’re business model is based on the billable hours your team is able to complete, and you have a varying rate card, then knowing if your company is trending up or down in average revenue per billable hour is absolutely important.

Another KPI that may prove useful to your business is number of prospects or potential projects.  If you know that the average duration between initial contact and project proposal approval is 90 days, and you have 10 projects closing within the 90 days immediately ahead, but only 6 current prospects, then you can confidently project that you’re going to have less active projects over the next 90 days than you have today.  What allows you to see this potential decrease in revenue coming would be the fact that you are actively tracking the number of prospects you have, and you can then set a goal to increase the number of prospects.

What Insights Can Key Performance Indicators Provide?

Key Performance Indicators can lead to a deep wealth of insight for your business.  Here are just a few examples:

  • Marketing Platform Effectiveness
  • Sales Pipeline Optimization
  • Cash Flow Sustainability
  • Average Revenue per Hour per Employee
  • Most Effective Social Media Posts
  • Customer Retention Impactors
  • Revenue Boosting Activities

How to Choose KPIs for Your Business

To determine which Key Performance Indicators are most important for your specific company to track, start by asking yourself what you need to know.  In the overview of Ask Measure Learn by Lewiz Finger, Amazon explains, “You can measure practically anything in the age of social media, but if you don’t know what you’re looking for, collecting mountains of data won’t yield a grain of insight.”  I couldn’t agree more.  Data is simply an overwhelming amount of numbers until you understand where to look for the answer to the question you are asking.

“You can measure practically anything in the age of social media, but if you don’t know what you’re looking for, collecting mountains of data won’t yield a grain of insight.”

Is customer retention of most interest to you, and you want to know if it’s because those customers receive more in-person meetings than others? Do you need to know which sales team members rise to the top each month, and you have a theory that it is because they make the most sales calls?

Whatever your goal is, first define the question that needs to be answered.  Examples are, how many sales calls did we make this month?  What is the average duration of our client meetings?  How many billable hours do we complete each week?  Remember, that the questions you ask must be reflective of your goals, key to your success, and be able to be measured.

Once you have determined the 3 or 4 most important questions that KPIs can answer for you, don’t fall into the trap of analyzing data that you already have.  In most cases, you can’t use data you’ve always had to answer a question you have never asked.  Instead, you must define new ways to capture the specific data that will answer the questions being asked today.

Setting up a system to track the data may be as simple as pulling together reports, or it may require implementing new tracking mechanisms, such as timers to track hours, or weekly computing of custom acquisition per sales call total.  Keep in mind that the purpose of tracking these KPIs is to improve the success of your business, so if time or money needs to be put into tracking them, it should be viewed as an investment in the future of your company, not purely an expense.

KPIs from Department to Department

Your KPIs will fall into various categories of your business activities, and most likely relate to the departments of your company.  Even if you are a solo entrepreneur, you are operating within several departments.  Your sales, marketing, and finance departments will all have different KPIs that will prove most beneficial to their department.  Together, all of the KPIs will formulate a clear representation of how your business is performing.

Below is a brief summary of data that can be gained from various departments within your company.

Sales

  • Customer Attrition
  • Cost per Lead
  • Sales Quantity
  • New Leads
  • Profitability per Customer Demographic Segment

Marketing

  • Social Media Followers
  • Email List Subscribers
  • Website Visitors

Finances

  • Assets
  • Debt to Equity Ratio
  • Accounts Payable
  • Accounts Receivable
  • Net Profit Margin
  • Average Hourly Rate
  • Revenue

Production

  • Billable Hours
  • Non-Billable Hours

How Often Should You Track KPIs?

Once you have established the Key Performance Indicators that will be beneficial to reaching your goals and established how to track the data, the question becomes how often should you track the KPIs?  The short answer is that your data should be tracked in real-time by systems to capture information every single day.  The long answer is in more in regards to how often you should compute KPIs that require calculations to be done, rather than just tracking data.

Daily Tracking

There are few KPIs that you would track or compute on a daily basis, because you will not likely be analyzing or adjusting your activity on a daily basis.

Weekly Tracking

KPIs that are related to team performance will often be most beneficial to track on a weekly basis.  Variables within the performance of team members vary greatly from day to day, but on a weekly basis the averages will be more consistent and be easier to compare to each other.

Monthly Tracking

Monthly tracking and calculation is the most common frequency for KPIs.  That amount of time allows for anomalies to work themselves out and for averages to provide more consistent and reliable data.  KPIs that relate to the financial performance of your company may be able to be tracked on a weekly basis, but more likely a monthly basis will provide the greatest level of insight.  Most companies develop budgets on a monthly basis, and your financial software, such as QuickBooks, will offer reports on monthly data.

Quarterly Tracking

There may be some bigger goals for your company that quarterly KPIs may be best suited for, however don’t fall victim to establishing quarterly KPIs simply to avoid having to do the work each month or week.  Consider that if you are only utilizing quarterly KPIs, you will be forced to wait a minimum of 6 months between starting your tracking and being able to compare one period to the next.  You’ll also only give yourself 4 opportunities per year to take action that will boost your success.

Annual Tracking

Similar to the argument against quarterly tracking, annual tracking and calculation is far too long to wait between periods.  Of course, some data will be available on an annual basis, such as company revenue and profit margins, but those are more for historical data purposes and for setting the next years goals.  They are less about taking periodic action to increase your success.

How Often Should You Analyze the Data?

Your Key Performance Indicators should be monitored consistently.  Some indicators, such as monthly revenue or weekly list subscribers, will only be able to be analyzed at the end of each period they are tracked.  For example, you can’t compare last month’s revenue to this month’s revenue when you’re only a few days into the new month. It won’t be an accurate comparison.  You’ll have to wait until the end of the current period before comparing to the previous period.

To establish a routine of analyzing your key performance indicators, commit to a systematic period of review. Weekly or monthly work best. Daily is too frequent, and quarterly is too seldom.

Personally, I prefer a systematic monthly review and analyzation of all KPIs.  By reviewing each month, you’ll have a healthy amount of data (30-days worth) and also provide yourself 12 opportunities each year to make adjustments in an effort to boost the performance against your goals.

Analyzing the data more frequently than per month will often lead to small amounts of data with rare fluctuations that could be interpreted as significant indicators.  Analyzing less frequently than per month will limit the number of opportunities you have each year to make the adjustments necessary.

Of course, if tracked and captured appropriately, your data should always be available to you. So, when the opportunity to make an informed decision based on insights gained from KPIs presents itself, you can immediately reference your key performance indicators.

Tools to Help You Track Your KPI Data

Take Action, Take Action, Take Action

Once you have asked yourself what you need to know, defined the metrics that most impact your goals, established a system to track the data, and invested the time to analyze the findings, be sure to complete the most important step of all: taking action to boost your success!

If you’ve implemented KPIs into your business effectively, you will incredibly levels of insight into which levers to pull to improve the performance of your business.  Your KPIs may tell you that increasing your social media activity leads to acquisition of new customers.  Great to know, but if you do not take action to increase your social media activity, you’ll never truly benefit from the opportunity your work with Key Performance Indicators is providing you.

About Shawn Waite

Hi, I'm Shawn. An operations and finance professional who gained his experience in New York City before relocating to Austin, Texas. I love my wife, my twin daughters, and Legos. My mission is to make you more efficient, more productive, and more profitable. You can find me on Twitter @creativelutions and .

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