A Few Good Numbers...

Successful businesses will hit a point where answering “how much did you make” and “how much did you spend” just doesn’t cut it for understanding your business. There are enough factors within how much you spent that the reason expenses moved isn’t so clear. You have enough products and different revenue sources where it isn’t immediately apparent what is driving things. And then there are things not on the financial statements or included in bookkeeping like growth or utilization that are becoming more important.

When you start asking those next level questions, you’re now in the world of KPI’s.

‍What does KPI stand for?

KPI = Key Performance Indicator.

You can think about it like a few important performance metrics that give you a quick read on how things are going across the major functions of your business.

‍Why are KPI’s important?

Ok, imagine your business is a machine (I know - this guy and his ‘machines’). That machine is made up of different parts that do different things. You have the advertising and marketing part that tells people about your business. The sales part that gets people to buy your product. The labor part that does the work for clients… you get the idea.

If you just ask, how is my business doing, that’s like looking at the output of the machine. Important. The most important. But it doesn’t tell you if that’s up, down, good, bad, or why. You need to see the individual functions to have a good picture for what the business is doing and why so you can do something about it.

You need little gauges all over the business to know what’s working at what isn’t. Those are performance indicators. And because you can’t track, manage, and improve ALL of them, you need to pick the most important few - and there we have our “key”.

Quick example: your business is doing ok but you want it to be making more money so you think, “ok, we need to grow. Easy. Let’s add a new product because more products = more sales = more revenue.”

So you pour more and more money into a new product to get more sales and… you make less money.

What happened was, your new product which was a cheaper product intended to sell more to people who couldn’t afford the more expensive ended up cannibalizing your more expensive product. You sold the same number of products but now got less money for them and your margins went down.

If you had looked at each component of your business you would’ve seen that sales were actually good but the average value per sale was low.

Knowing that you would’ve focused on increasing transaction values - maybe adding a new complementary add-on product that boosts your average cart size. Now the same number of sales creates more revenue.

In short, you saw a general output problem and focused on the wrong part of the machine to fix it. 

What are some important KPI’s?

KPI’s will vary a lot depending on your business but here are the general areas you want to measure and some metrics that get you pointed in the right direction.

Sales funnel metrics:

• Traffic to site
• Leads generated
• Leads per channel
• Calls booked
• Proposals sent
• Conversion to sale
• Cost of acquisition
• Cost of acquisition / Lifetime value
• Return on ad spend
• Average transaction amount
• Repeat customer rate

Product metrics:

• Average deal size
• Number of items per cart
• Average price per item
• Customer satisfaction
• Exchange/Return rate
• Customer service issues / customer
• Conversion to sale by product
• Unit profitability
• Lifetime value

Operations

• Production total time
• Production capacity & utilization
• Labor utilization
• Revenue per employee
• Labor as a % of revenue
• Software cost / employee
• All in cost of employment per employee
• Overhead as a % of revenue

Finances

• Outstanding AR
• Outstanding AP
• Cash on hand
• Days in AR
• ARR & MRR

That’s a lot and there are a lot more. The important thing is to think what is most critical to my business and which of these are most representative of if I’m doing well. Then narrow it down.

I like to have a couple layers of metrics.

I have some high level numbers like revenue, number of clients, average value per client, and my major cost areas - sales, direct labor, overhead - as a percent of revenue. At a quick glance I can see if I have a growth / sales issue, a product issue, or an infrastructure issue.

My next layer of numbers drills into each just a little bit more.

For example if number of clients is low, I’ll have more detail that shows how many new clients came in, how many leads, what my conversion rate was, and if I lost any clients.

Two levels is enough for regular reporting. Anything deeper than that I do on a one off so I don’t track too many metrics across all areas. I will dig in deeper, but only on something very specific once I’ve isolated where to dig.

All that to say, I’m less focused on giving advice on which KPIs you should use, and more focused on explaining how to use them and letting you determine what is important for you.

‍KPI Starter Pack

Ok… if I had to pick a few as a general starting point here’s the list I’d make and the questions I want answered regularly:

• Traffic / Leads by channel - do I have an awareness/reach problem
• Conversion rate - do I have a sales closing problem
• Total new sales - how am I relative to goals
• Total clients (if recurring) - how am I relative to goals
• Average value per sale/client - do I have a product / client value problem
• Gross margin - do I have a profitability problem
• Cost of sales as % of revenue - am I on track for $ to sales as a %
• Cost of direct labor as % of revenue - am I on track for $ to sales as a %
• Cost of overhead as % of revenue - am I on track for $ to sales as a %
• Cost ($) per new client/customer (cost of acquisition) - how much am I spending on new business
• Team capacity utilization (for service businesses) - how much capacity do I have to grow and how profitable are my people
• Revenue / employee 
• Cash on hand - do I have enough cash
• Amount outstanding in AR - is more cash expected
• Amount outstanding in AP - is more cash going out
• ARR/MRR - how am I trending to my total ARR/MRR goal

One page dashboard?

• Revenue YTD vs target
• # of clients / sales
• Value per sale/client
• Gross margin
• Cost of sales, labor, and overhead as % of revenue
• Cash + AR - AP
• ARR/MRR

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There’s your crash course in KPI’s and dashboards. If you’d like help setting one up, join us for a workshop OR we’re happy to handle it for you. Reach out.

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