Importance of KPIsKPIs are quantitative measures of a business’s financial performance. When KPIs perform well, you know you’re on track to meet bigger business goals. They provide you with specific insights you can use to improve financial performance. Additionally, you’ll use KPIs to compare yourself to other businesses in the industry. Tracking KPIs helps you understand what’s possible and where you can perform better. This allows you to create more realistic goals that promote business growth. You can use KPIs throughout your business to promote efficiency, cut costs, and increase profits. When discussing financial KPIs in particular, you may continually track:
- Gross profit
- Revenues minus expenses
- Net cash flow
- Earnings before interest and taxes (EBIT)
- Days in accounts receivables
- Incomes sources
Why you should keep your KPIs front and center all yearYour KPIs are a continuous measure of progress. They show you the heartbeat of your business over time. Generally, KPIs come in two types:
- Lagging KPIs
- Lagging KPIs reveal the most when looked at in hindsight. They tell you how well you performed and whether or not you achieved your goals. Even though you’re looking at them in hindsight, you still need to keep them as current as possible. That way, you always know where you stand.
- Leading KPIs
- Leading KPIs predict how you will perform based on your trajectory. They allow you to spot issues and make immediate improvements.
How to keep your KPIs front and centerTo be able to get the most out of your KPI’s, you have to know how to make them a priority. Here’s how to make that happen.
Center your KPIs around your goalsReaching your financial goals is likely to be a top priority for your business. To achieve those goals, track KPIs that give you the information you need to succeed. Naturally, when you center your KPIs around your goals, you’ll need to refer back to them often so you can track your progress. Goals can’t survive alone. For example, let’s say your goal is to improve cash flow. In order to do that, you must lower costs and/or increase revenues. Trying to increase cash flow while ignoring the KPIs that contribute to it would be fruitless. Other metrics like cost per channel and expense/budget variance further define this goal’s success.
Include the most important KPIs in your dashboardYour financial dashboard is the first thing you see when managing finances, making it the perfect place to keep your most important KPIs. By far, the best strategy is to narrow down the KPIs that matter most to reaching your goals and put those front and center. This way, they are easily accessible and you can stay focused on what matters. Note: It’s still important to track the rest, but only for drill-down purposes when you need to understand why a KPI is performing as it is.
Schedule monthly check-insIf you’re not already, you should be regularly checking in with your KPIs to measure your financial progress. Put it on your schedule, and don’t push it aside for other priorities. Healthy businesses make finances a top priority. Monthly, scheduled check-ins keep you informed. They’ll be fresh in your mind, and you can use them to measure and redirect your progress more often. During these check-ins, you’ll review your numbers so you can take a data-driven approach to growth. Vital tasks during these meetings may include:
- Reviewing budgeting and target setting
- Ensure you’ve defined where you want to go and allocate funds appropriately to get there. No business is working with unlimited resources, so it’s important to write this out and revisit it.
- Reviewing forecasts
- Forecasts are a critical tool. During check-in, you’ll compare what you forecast to reality to understand performance. This data can be eye-opening. It may reveal you’re targeting the wrong customers or that economic shifts are impacting you less than you thought.
- Getting a handle on cash flow
- Cash flow is one of the most vital indicators of business success. When you have significant positive cash flow, you have room to breathe, can maneuver quickly, and weather storms. During check-ins, you explore factors contributing to your positive cash flow to increase the margin.