If you’re a regular reader of our articles, you know that we are big advocates of using Key Performance Indicators (KPIs) to measure and quantify business goals and achievements. Some of you may be reading this and asking why KPIs are so important — or you may also wonder which KPIs to choose? There is no cookie cutter answer for KPI selection and quantification; the first step is understanding what KPIs can do and why they are so important to running your business. And since we are entering the budget season for companies that have a 12/31 year end, this would be the perfect time to start or refine your KPI creation and standardization. 

A fundamental question is: How does a company choose the right KPIs?

Key Performance Indicators illustrate how your organization is performing as compared to your expected or budgeted results. Although there can be many potential indicators that show how a business is performing, it’s important to pick ones that are most relevant to your industry, company, and in certain cases, division or department within the company.

You will know that you’ve selected the right KPIs if they have the following characteristics:

1. 1. 1. Consistent with Company Goals: If you are trying to increase your revenue, an obvious KPI would be to track sales for a given period. However, if your goal is to decrease outstanding debt, you might want to measure operating cash flow or how quickly you are collecting receivables. The important take-away here is that the KPIs you choose should align with the goals of the business.
      2. Consistent with Stage in Company’s Life Cycle: A company that is just starting should be focused more on how much cash they are burning and the amount of customers they are retaining per month. A more mature company may want to look at KPIs that indicate longer term trends, such as monthly recurring revenue and the cost to acquire a customer. The important take-away is KPIs should consider what stage the company is in financially and/or chronologically and reflect the company’s maturity. 
      3. Consistent with Industry Norms: Business goals should be reasonable and attainable when compared to expectations within the industry or sector. For example, it would be unreasonable for a retail company to seek 40% gross margins and utilize KPIs to measure progress towards a goal that is neither realistic or pertinent to the health of the company.. It is worthwhile, however, to try to exceed the norms of competitors and have stretch goals, provided that the stretch goals are not viewed as average performance numbers. 
      4. Consistently Actionable: The information that is gleaned from KPIs should not only be interpretable, but it should also be actionable. If your KPIs are lower than what was expected or significant milestones are not met, then a remediation step follows. For example, if a company’s goal was to have revenue-per-employee be $100,000 and it’s only $92,000 per person, the company can then determine what the appropriate course of action is, e.g. does there need to be a headcount reduction? A company’s KPIs provide information that easily translates into action that will support reaching, or furthering, its goals. 

As we start to enter the fourth quarter of the year and begin planning for next year, a key measure of success is being able to determine, in quantifiable terms, how you are performing against your expectations. Key Performance Indicators are an excellent way to measure your performance, both financially and operationally. Having quantifiable and unbiased data to view and gauge your performance is vital to any company, but it is especially important to entrepreneurs and small business owners.

Take-away: If you are uncertain how to calculate KPIs or need assistance in preparing for your 2025 one-year and three-year plans, please contact Brian at info@acceleratingcfo.com.