Did you know that there are ways to get a struggling business back on track long before you hear rumors of a bad quarter or a down year?
Today, we’re going to discuss what I call the “early warning satellites” for a healthy business: key performance indicators, or KPIs, for short.
I’m always amazed when I encounter a business that does a half-million, one million, or sometimes upward of five million dollars in annual sales, yet they have no idea what they’re actually bringing home. Rather than relying on financial statements and other timely reports, they have to wait for the end of the month, quarter, or even year to determine where they are at financially. In some cases, these business owners don’t even know whether they’ve been profitable until tax season rolls around!
The harsh reality? This isn’t a viable option for business owners that plan to stay in business—particularly today, as many customers are feeling the impact of inflation and adjusting their buying patterns accordingly.
The last thing you want is to be caught off-guard by sinking gross profit margins. The sooner you can identify when things start to go awry, the better.
First, What Is a KPI?
Simply put, a KPI is any metric a business uses to assess its performance relative to its objectives. These are typically easy-to-measure data points that can signal a warning with reasonable levels of accuracy.
If you’re not currently using KPIs to monitor the health of your business, you might not know where to start! Let’s look at a few common examples. Many business owners measure:
- Product mix percentages by major category.
- Gross margins by major category (or by top-selling products).
- The average cost of major products purchased.
- The average discount of major products sold.
- The total labor hours to produce and deliver major products.
- The percentage of returned products by major product category.
- The percentage of customer mistakes by major product category.
These are just a few of many key performance indicators companies use, and they often vary from one business, market, or industry to another. In theory, any metric can be a good KPI—as long as it’s easily measurable and provides reliable data you can act on.
The best part? KPIs don’t have to be complicated! For example, some of the most successful car dealerships track data points as simple as the number of people who came in to test drive and measure them against other metrics—like how many of those test drivers received a proposal, purchased a new vehicle, or bought the extended warranty!
Which Metrics Are Important to Your Business?
Jot down the KPIs that are most valuable to your company, and then ask your accounting department to deliver this information to you in its simplest form. You don’t need to be an accountant, but at the very least, you should be able to read the numbers and, most importantly, know what to do with them.
Don’t have an experienced accountant or CPA who can handle this for you? It’s worth hiring one!
After all, if you can identify trends early on—such as shrinking margins—you can act swiftly to remedy the situation before it’s too late. Now you’re no longer blindsided by a bad quarter or a down year and can instead course correct, minimizing the damage. It’s the difference between being a reactive and a proactive business owner.
One of my clients lost a major customer who was responsible for over $400,000 in gross profits. Because they were tracking their most important KPIs, they quickly noticed that a major category had experienced a sharp decline in sales and were able to investigate the issue.
As it turns out, their $400,000 customer had only stopped buying because their last purchasing agent had left the company and the new hire had been giving their business to another company instead. Fortunately, my client was able to reconnect with the lost customer, resell to them, and win back their business—saving that customer and recouping most of their gross profit!
If you want to be in control of your business rather than lagging behind, unaware of shifting market conditions, you need to start tracking KPIs today. Devise a plan, get into the numbers, study those weekly reports, and watch your business flourish!