Do small businesses really need key performance indicators?

Are you achieving your business goals?

In a challenging economic climate, it can be all too easy for a small business to lose track of its targets and simply battle problems when they arise, rather than identify the underlying causes of the problems.

Effective key performance indicators (KPIs) can help prevent this.


To measure is to know


Nineteenth century physicist and engineer Lord Kelvin said “to measure is to know” and “if you cannot measure it, you cannot improve it”.

With an effective KPI plan, you can gauge how well your business is doing in a specific area and highlight what needs improvement.

You can use KPIs to measure financial metrics such as profit, cash flow and cost expenses, customer metrics such as customer numbers and customer satisfaction and retention, and employee metrics such as staff productivity, absenteeism and turnover.


What key performance indicators should you implement?


An article on The Balance Small Business website, Key Performance Indicators (KPIs) and Why They’re Important, states that KPIs have three main characteristics and to be effective they must be based on legitimate data that reflects the business’s objectives.

KPIs must be:

  • Presentable numerically.
  • Integrate with existing organisational processes.
  • Able to be implemented to create the desired change.

In a nutshell, your KPIs should be simple, easily measurable and relevant to the goals of the business you operate in.

For example, say you run a local gym, KPIs you may want to use could include:

  • Number of new contracts per month.
  • Number of contract cancellations per month.
  • Customer satisfaction.
  • Equipment maintenance costs.
  • Cleaning costs.
  • Energy costs.

Obviously, the number of new contracts is important because this is how to achieve business growth and the number of new contracts should certainly exceed the number of cancellations over the year.

If customer satisfaction is high there is a greater chance of retaining members for the long term. And of course, running costs must not be overlooked.

Let’s look at another example, say you run a small manufacturing company. When reviewing your material costs you realise that your employees have bought too much material from too many suppliers.

By focusing on only a few suppliers, you find that you can then negotiate purchasing costs. You agree to purchase certain quantities in advance for an immediate discount and set procedures on how employees are allowed to proceed with purchasing. In six months’ time, your KPIs show that you have reduced your production costs by 10 per cent.


KPIs that every small business should have


In a Forbes article, Five Performance Indicators Every Small Business Should Use, the author outlines five basic KPIs for all businesses:

  1. Margin

Businesses should not focus on sales volume, but margins and profit volume and set out the amount of profit to be achieved by the end of the year.

  1. Balance Point and Optimal Point

A business must know exactly what sales volume is required to break even on a daily or weekly basis, as well as the optimal sales point to achieve its profit goal by the end of the year.

  1. Average Period of Collection and Payments

The author describes business cash flow as “gasoline for the car” and says the gap between collection and payment should be as small as possible to avoid a situation where a business becomes a “lending bank”.

  1. Profitability of the Different Products/Services

The costs of each product or service offered should be rigorously monitored and sales should be focused on those with a higher margin.

  1. Information from the Database

A business’s database can provide vital information on:

  • Repeat custom.
  • How to increase profit by focusing on popular products with greater margin.
  • Cross-selling actions.
  • Conversion rates, which enable implementation of corrective measures.


Your KPIs must serve a purpose


KPIs are not an end in themselves.

Ultimately, the purpose of KPIs is to provide measurements of performance which allow you to make effective decisions and help you identify and fix problems.

Once you understand what your KPIs are saying, it is then up to you to take action to bring you closer to your goals.