I’m always amazed when a business that makes $500,000, $1,000,000, or perhaps even $5,000,000 has no idea what they’re making.
If they are relatively organized, they may be able to see what they are making at the end of the month. Otherwise, they may have to wait until the end of the quarter, the end of a six-month period—or worse yet—the end of the year!
Unfortunately, this simply isn’t an option if you hope to keep your gross margins high. The best business owners track daily and weekly key performance indicators (KPI), which allows them to identify the trends that are reducing margins as soon as possible. As a result, they are able to address problems before they have the chance to snowball into a bad quarter or a bad year.
Ready to start tracking KPIs like the savviest business owners in your industry? Here’s how you can get started today:
First, Identify the Right KPIs for Your Business
The first step is to identify the key performance indicators that are going to be most helpful to your business. While there are hundreds of KPIs your business could choose from, here are some fairly common KPIs that businesses will often track:
- Product Mix Percentages by Major Product Category
- Gross Margins by Major Product Category or Top-Selling Products
- Average Price for Top-Selling Products
- Average Cost of Major Products Purchased
- Average Discount for Major Products Sold
- Total Hours of Labor to Produce Major Products
- Percentage of Returned Items by Major Product Category
- Percentage of Customer Mistakes by Major Product Category
Of course, these are just a handful of common KPIs that you could use to monitor your gross margins. Depending on your business and industry, your KPIs might look much different than that of another business. In fact, you may even choose to come up with your own!
Car dealerships, for example, will track the number of people who came in to test-drive vehicles. Of the people who came in to test drive vehicles, they then will track the number of them that asked for proposals. Of the people who asked for proposals, they will then track the number of them that closed. Of the people who closed, they will then track the number of people who bought the extended warranty.
Get Your Accounting Department on Board
After you have determined which KPIs would be best for your business to track, ask your accounting department to provide you with those figures in a simple, condensed form.
When I worked for Coca-Cola, we would give a “daily report” that only included the key performance indicators that management wanted to track. These would often include not only daily KPIs but also monthly KPIs. This gave management both the smaller picture and the larger picture of how the company was performing.
Of course, you can leave the technical element of aggregating these figures to your accountants. You just need to know what the numbers mean and what to do with them. If you don’t already have one, consider hiring an accountant who has experience in designing custom reports with key performance indicators.
The Bottom Line: Tracking KPIs Allows You to Be Proactive Rather Than Reactive
One of my clients had recently lost a major customer that was accounting for approximately $400,000 – $500,000 in sales and roughly $200,000 – $250,000 in gross profit.
Now, because my client’s business does about $4,000,000 in sales, it didn’t come to their attention right away. As soon as they realized that the sales numbers in this major category were dropping, however, they promptly investigated the issue.
What they found was that the person in charge of purchasing at the customer’s company had quit and had been replaced by someone who was giving the business to their friends instead. When my client found out about this, they were able to go back to the owner of their customer’s company, resell, and ultimately keep their business.
Now, imagine for a moment that they had waited until the end of the year to discover the issue and take action. It’s likely that they would have lost that customer for good!
You need to get into your business’s numbers, and tracking your business’s KPIs allows you to do just that!