How key performance indicators can help your small business
Important small business KPIs to track
Key performance indicators is another of those phrases business people use that sounds fancier than it actually is.
Key performance indicators (KPIs for short) is just another way of saying measurements – specifically, measurements that indicate how well your business is performing.
These can include financial figures such as sales, profit, and costs. As a business owner, you should have a business plan setting out your goals, budgets and expected performance, revenue and expenses and check each month how you are doing against it.
But key performance indicators can also be non financial figures, such as the numbers of new customers, inquiries and complaints, or figures which don’t directly relate to how your business is performing but are still important, like colleague absence rates.
Why are measurements important?
The more you keep on top of your figures, the earlier you can spot any issues.
If you don’t drill down into the figures, the fact that things look okay overall might obscure areas where things aren’t so healthy.
If a store isn’t trading so well, irrespective of how the overall business is doing, you’ll still want to know about it so you can tackle it and serve those customers better.
Equally, you want to know where things are going well so you can implement things that have worked across the business – and also so you can give praise and rewards where they’re due, to yourself as well as others. Being in business can involve a lot of stress and worry and it’s important to celebrate your successes.
Looking at different measurements helps you to build up a detailed picture of your business’ performance and understand not just how it’s doing but why that is.
For example, if you’re getting a lot of enquiries but few conversions into sales, you’re obviously advertising your product in an appealing way but perhaps targeting the wrong customers or pricing your product wrongly.
It’s also useful to compare data with previous years, so you become aware of seasonal trends.
Profit versus cash flow
Few measurements are more important than your cash flow forecast.
The fact that you need to be making a profit is a given but managing your cash flow – making sure you have enough money available when you need it – is just as crucial.
Businesses often go under not because they are not turning a profit but because the cash isn’t coming in quickly enough for them to cover their costs. Your suppliers may take up to 60 days to pay your invoices.
Preparing cash flow forecasts allows you to foresee possible issues in good time, and take steps to deal with them. You can also predict how your business might perform in different scenarios, such as increases or decreases in sales, customers, prices and costs.
You should forecast your cash flow over a set period – maybe 12 months – ideally through a rolling forecast which you update every month or every week, always forecasting 12 months into the future.
An accountant can help you with this – and with tax planning, so you’re prepared for the different tax bills businesses face throughout the year.
It’s not all about you
It’s important to keep track of how your competitors are performing too and the market as a whole – both specifically in your sector and in general.
For example, if you’re not acquiring as many new customers as you expected to but no one else is either, this might be due to an economic downturn – or to changes in your sector to which you may need to adapt.
Alternatively, if everyone else is doing brilliantly whereas your business is not, then the source of your problem is likely to be closer to home.
You can look at other companies’ accounts on Companies House, or pay for industry reports or broker reports (written by investment banks).
You should also keep tabs on your competitors’ websites, customer reviews and social media.
If it ain’t broke, don’t fix it
… isn’t always the right mantra in business.
No matter how well you’re doing, you should never rest on your laurels.
You should always be reviewing the figures to make sure that every part of your business is running as efficiently as possible – reducing faulty products, tightening up the production process, speeding up delivery times.
Doing this in the good times will mean you’re much better placed to weather the bad times; – even successful businesses are impacted by recessions.
Review your outgoings regularly to see if there are areas where you can save money and examine closely how different teams are spending their budgets. Are you getting the best deal on your utilities, broadband and business bank account? If you have debt, can you save by moving to a different lender?
A numbers game
As accountants, this is hard for us to say but: all the above notwithstanding, don’t fall into the trap of thinking that numbers are the only important indicators of a small business’ success.
Not everything can or has to be measured and measurements aren’t enough on their own. Qualitative feedback from your customers and team is crucial to understanding how you can do things better.
And always trust your instincts and do what you think is right. No matter how shiny the figures supporting a particular course of action, if you feel strongly that it’s wrong for your business, don’t take it.
At THP Chartered Accountants, we help entrepreneurs across the south east crunch the numbers and fathom the figures to get the best out of their business.
We have a team of more than 50 professionals based at our offices in Chelmsford, Cheam, Wanstead, Saffron Walden and London City – call us at our head office on 020 8989 5147 to chat about our accounting services and how we can help your business reach its potential.