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What is a KPI?
Key Performance Indicators (KPI’s) are critical tools for monitoring the health and success of your business. KPI’s are used in order to reach your ultimate goals. At Logistis we always say, “you cannot know where you are going, unless you know where you are.”
In order to understand KPI’s, let’s start with a metaphor. Think of yourself embarking on a road trip. You have a certain destination in mind and there are certain things you would like to see along the way. You must arrive by a certain time and you have a car to get you there. The car has cruise control, GPS, runs on fuel, has a tire pressure gauge on the dashboard, etc.
At the start of the journey, you know how to get to the first marker by memory. You do not need the GPS for the first leg of the trip, so you put the car on cruise control and hit the road. The next leg of the trip is through a busy city with traffic and unfamiliar streets. You are unable to use cruise control, so you turn that off, and turn on your GPS. During the entire trip you never stop looking at the fuel monitor because you need fuel to keep moving forward. At the next stop, you notice a light on the dashboard that is telling you tire pressure is low. You take action and immediately replace the tire.
If you think of KPI’s like the instruments on a car, you are able to shine a spotlight on specific items that may need extra attention in any given period, plus, you can continually track critical metrics in order to keep moving in a positive direction.
Continuing with the road trip metaphor, KPI’s can be applied in a similar way to your business’s adventure. Sometimes you need to be tracking specific KPI’s more than other times, sometimes it is necessary to track an item with respect to where you are on the journey, and there are likely items that will always be tracked, such as revenues and profitability. In order to reach your destination, you must break it down into manageable periods for which you can take action. You must ultimately know where you want to go, but KPI’s can be your instruments that help make sure you stay on course.
How do you begin to establish the proper KPI’s for your business?
- Set goals, objectives, targets or budgets
- Analyze factors playing into achieving the goals from Step 1
- Select you KPI’s based on the important factors in Step 2 (Start with choosing 3-5 KPI’s to track)
- Set up the KPI’s metrics in a reporting software and collect data (*Pro-tip, while it is not necessary, it helps to have historical data for KPI analysis)
- Review and analyze the results on a monthly basis at the very least
- Set corrections as needed. If one area is severely affected, develop further analyses and track.
Most common KPI’s to start tracking
- Monthly recurring revenue (MRR) (if on recurring auto pay)
- A/R Avg collection period (if invoicing is a part of your process)
- Revenue / Sales Growth
- Top 5-10 Expenses as a percentage of gross revenue
- Average revenue per client (ARPC)
- Burn Rate
- Profitability Ratio
- Free Cash Flow
How important is it to know your numbers?
How important is it to understand your finances and track KPI’s? Let’s look at the numbers.
The SBA has compiled data on the success rates of businesses that produce, review, and analyze their reports. Here is what they have found.
1) Annually – when they have to give their accounting records to their CPA to do the taxes = 25%-35% success rate
2) Monthly – because they have come to believe they should = 75%-80% success rate
3) Weekly – 52 times a year without fail = 95% success rate
As you can see, there is a clear correlation between being diligent in the review and analysis of financial metrics and the overall success of a business.
Here at Logistis we partner with Fathom to help build customized reporting and KPI tracking tools. If you want to build a successful business, tracking KPI’s is critical.