Key Performance Indicators

Key Performance Indicators (KPIs): What they are and why they’re critical for business leaders

The business owners who will thrive over the next 12 months will understand, and have visibility over, every aspect of their businesses and finances. That's why it's essential to identify and update the Key Performance Indicators (KPIs) for your business.

Do you know your Key Performance Indicators?

As we’ve previously said, the businesses that will thrive in the year ahead, make the right strategic decisions, and cope best with economic headwinds will be those who understand every aspect of their businesses and finances, as close to real-time as possible.

With that in mind, as a business owner, have you identified your key financial and non-financial KPIs (Key Performance Indicators)?

What is a KPI?

A Key Performance Indicator (KPI) is a measurable value that demonstrates how effectively your company is achieving its primary business objectives. A KPI is used to track and evaluate the success of specific business goals and strategies.

What makes a good KPI?

A good KPI should be:

Aligned and Relevant: You should make sure that your KPIs are directly related to your business’s strategy, goals and objectives.

Achievable: Linked to the point above, your KPIs should be realistic and achievable within the set timeframe and with your current level of resources. If a KPI is unachievable, your team could lose motivation and your credibility could be damaged.

Actionable: Any KPIs you choose should provide insights that influence your decision-making and support your strategic planning.

Comparable: Ideally you should be able to compare your KPIs to your own benchmarks and industry standards. Internally you should be able to evaluate your performance in relation to previous time-periods and externally, you should be able to evaluate your performance against competitors and others in the industry.

Clear: Your KPIs should be clear and easy to understand if you want your people to effectively monitor and track their progress and to use them to make informed decisions.

Measurable: Your KPIs should be quantifiable, otherwise you won’t be able to monitor your progress over time. Critically, you should also determine how you’re going to track progress and who is responsible for measurement.

Time-bound: You should set a specific timeframe for measuring your progress and achieving the desired outcome.

Key Performance Indicator Dashboard

What financial metrics should your business track?

Your key financial KPIs should include figures such as revenue, profit, gross profit margin and operating margin.

But in an uncertain economic market you should also be aware of some other financial metrics that can indicate your financial position and level of stability, specifically headroom, and runway.

An up-to-date and accurate cashflow forecast is absolutely critical if you want to understand and have clear visibility of these metrics.

If you don’t have a cashflow forecast in your business, get in touch with us today and we can help.

Headroom

One financial metric you should be tracking in an uncertain economic climate is ‘headroom’, the difference between your required cash resources and your available cash resources. Your headroom can indicate your financial flexibility or the ‘cushion’ you have against any unforeseen circumstances.

If your headroom is tight, you should be looking to increase your ‘buffer’. You can do this by increasing revenue, increasing prices, reducing costs and expenses, negotiating better rates with suppliers, securing additional funding, improving efficiency, or optimising working capital by extending payment terms with suppliers or improving debt collection.

Runway

Runway is another financial metric you could use as a KPI, particularly for start-up businesses. It refers to the amount of time you have before you run out of money or need to secure additional funding. You can work this out by dividing your current cash reserves by your monthly burn rate – how quickly you’re using up cash.

If your runway is disappearing fast, you will need to source finance, reduce your costs or increase your revenue quickly.

Non-Financial KPIs

Your non-financial KPIs will depend on your specific context and your goals.

But critically, you should measure these non-financial metrics with as much diligence and effort as financial metrics.

Examples of non-financial KPIs include customer satisfaction, churn-rate, on-time deliveries, productivity, employee satisfaction, lead conversion rate and innovation.

Key Performance Indicators

Are you getting the information you need to lead your business effectively?

In order to have a clear picture of your business’s health and performance at any point in time, and to make the most effective strategic decisions possible, it’s essential that you identify the most relevant KPIs for your business.

You should also review your existing KPIs and ask “Do they still give us the key information we need and are they still relevant to our goals and ambitions?”

Your KPIs will be unique to you and depend on your goals, your business type, your industry, and your customers. So if you need help identifying and tracking the core financial and non-financial KPIs in your business, get in touch with us today.

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