How do you apply KPI for your small business? we cover the basics you need to know.
Can you imagine going to a professional basketball game and finding out that the referees do not keep score for the game? Your first reaction would be to say “what the heck is going on”? Then you would probably leave the game and never come back. The same holds true for many small businesses today. They run under the same philosophy. They do not keep score of their business. This short discussion describes how you can get back into the game and start “keeping score”.
What is a KPI?
KPI stands for Key Performance Indicator. These indicators are quantifiable measurements.
So What Does KPI Have to do with Keeping Score of My Business?
KPIs are measurements used to track progress of a company to achieve established business goals. Without establishing goals and tracking their progress, your organization will never achieve its goals.
So where do I start? First, you define the key areas of your business. These normally include the following:
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So How Do I Create a KPI for these Areas?
Since KPI’s are critical measurements within these areas, start with defining what can be measured in these business areas. Let me give you some suggestions for creating KPIs in these business areas.
- Turns on inventory
- Costs of goods sold
- Manufacturing costs
- Monthly cost of Work in Process
- Mean Time to Repair (MTTR) (Average time in hours between the occurrence of an incident and its resolution)
- Time-to-market of new products/services
- Scrap value percentage
- Average order size
- Attrition or churn (Number of lost customers / Total customers * 100)
- Percentage of repeat business
- Average sales revenue per sales person
- Average customer acquisitions costs
- Average sales per customer or transaction
- Percentage of neglected opportunities
- Conversion rate of marketing campaigns
- Average response rates of marketing campaigns
- Amount marketing dollars spend as percentage of first year sales
- Marketing budget ratio (MBR) (Marketing investment as a percentage of total revenue)
- Inquiries growth percentage following a marketing campaign
- Contact Rate (Number of contacts effectively contacted / Number of contacts in the target list)
- Sales lead value ratio (Number of good sales leads / total leads)
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- Percentage of strategic objectives achieved
- Cost of non-compliance
- Number of process improvement initiatives
- Percentage of key controls
- Percentage of legal budget spent externally
- Total legal spending as percentage of revenue
- Age of data backup
- Cash on hand
- Cycle time to perform monthly book closing
- Percentage of financial reports issued on time
- Accuracy of financial statements
- Average costs to produce financial statements
- CAPEX forecast accuracy
- Account Payable to Revenue Ratio
- Average time to procure
- Percentage of invoices disputed
- Cycle Time of Purchase Order
- Percentage of invoices without purchase order
- Delivered goods On Time In Full (OTIF)
- Number and Percentage of suppliers not used in last 12 months
- Procurement spend per procurement employee
So what’s next?
Capture the KPIs on a monthly basis and conduct a management meeting to review the progress made. If KPIs are not moving to the level you want, develop a plan to improve those business areas. Then keep tracking to “keep score” of your business.
What do you think? Is this something small businesses should be utilizing? What are the problems a small business owner might encounter with this process? Comment below.