9 Spokes has developed a strategy for health-check metrics, which business owners can use to spot opportunities and potential threats.
Key performance indicators (KPIs) are the health-check metrics that businesses look at periodically to get an instant impression of what’s going on. Metrics are crucial to the success of any business, and regularly taking a health check of your clients’ business performance can help identify opportunities and deal with issues before they become too serious.
The business tools online software provider 9 Spokes has developed a free guide to help understand how to set KPIs and how your clients can shape their metrics to help their businesses survive and grow.
The characteristics of good KPIs
KPIs need to show real problems and not just the positive sides of the business. “Metrics need to hurt,” said Andreas Klinger, head of engineering at Product Hunt. “If you are not ashamed about the KPIs in your dashboard then something is wrong. Either you do not drill deeply enough or you’re focusing on the wrong KPIs.”
These are seven of the key things to check when defining KPIs:
- Any problem should show up in one of the metrics
- The metrics need to be easy to understand
- The calculation needs to be simple
- Metrics should relate to key actions in the company
- You need to be able to act on the metrics, ie avoid any potential issues you spot thanks to the metrics
- Avoid vanity metrics (those that only show the strongest aspects of the business), as they will not provide you with an accurate overview of what the company needs to do to improve
- Don’t choose more than six KPIs
The basic KPIs
The two key metrics for every business are revenue and cashflow. They show whether a business is making sales and the money left. Revenue plays a central role in every company’s health check KPIs. Both revenue and the revenue forecast for the following months will influence the business’s cashflow.
Additionally, cashflow is usually calculated over a period of six to 12 months. As it compares the money inflows and outgoings and indicates whether the business has enough money for certain activities, it greatly influences any plans for the company.
When calculating the cashflow it is important to consider a few factors, such as the role of payment terms, if clients are taking a lot of time to pay and what the company can do to reduce this.
Also, it is important to consider the impact of any overdrafts or invoice financing facilities, and whether the company is tracking aged debtors.
Important metrics to tailor to each business
However, besides the essential revenue and cashflow metrics, there are other KPIs that aren’t universal but that can be applicable and very useful depending on the company. Three of the areas that a company could choose to measure are service delivery, retention and engagement, and social marketing.
Service delivery: Is the company’s service meeting the expectations of its clients? For instance, if the metric is billable hours, the company will want most of the time to be spent generating revenue. When it comes to customer satisfaction and service delivery, one of the KPIs should be measuring whether the service is being delivered on time and on budget.
Retention and engagement: A higher retention level means recurring revenue. For instance, in the case of B2B sales, finding new business is always more time consuming and expensive than re-booking existing customers. Tracking the retention rates of the business gives valuable information to know if the business is on top of its customer satisfaction levels.
In the early stages, one-to-one contact might be enough to have an overview of the business. However, as a business grows it is useful to set a retention KPI to keep track of the customers that are coming back after the contract ends, or in the case of businesses dealing with one-off purchases the KPI could measure the rate at which customers come back to buy again.
Social marketing: Having a good social marketing presence is becoming increasingly important and many businesses are aware of it. However, although it is also important for brand awareness, an active social media presence should also be tracked with KPIs that show its impact on revenue generation and the company’s success.
One way to start is by examining how social media is helping the business gain new customers.
“ROI is one of the hardest metrics to measure through social, but it is the key bottom-line metric,” said Adam Blackford-Mills, digital marketing manager at MRS Digital. “Is your social making you money? By attributing social traffic to on-site conversions, you can start to get an idea as to exactly how much ROI you’re getting for your social media investment.”
Google Analytics can help with this task by showing which conversions (or completed activities, such as submitting a contact form on the company’s website) come from social media profiles.
Which KPIs have helped your small business clients the most in their attempts to survive and thrive? Is it just a case of turnover is vanity, cashflow is sanity, or is there more to it?