Setting KPI for Small Businesses: A Guide
One of the first things a new (and even experienced) entrepreneur wants to know about their business is how well they are performing. Having an idea about your business performance helps you prepare your next steps moving forward. While doing research is helpful sometimes, there is a more relaxed and more manageable way to measure your company's progress and get the results you want. That is by setting and tracking your KPIs.
What Are KPIs?
KPI stands for “key performance indicator.” It is a measurable value that organisations and companies use to evaluate how effective their strategies and implementations are in achieving their business objectives. It not only focuses on the company as a whole, but it can also measure how each business unit, individual, and project functions and assess how they perform alongside the business goals.
In short, the KPI serves as the company's navigational tool that shows where they currently stand and how far they are away from the destination they want to be at.
Why They Are Important
KPIs serve as your metrics in measuring your business performance. You can use them as a basis for the following:
Setting strategic objectives
Evaluating your business process
Making business decisions
How to Select Your KPIs
There's one crucial rule in setting your KPI: it should align with your business objectives.
In setting goals for your business, you have to consider three things:
They should be measurable
They should be actionable
They should be set within a reasonable time frame
Once you have a goal that you can measure, setting KPI would be easier.
Besides being aligned with your business objectives, your KPI should meet all these other four descriptions:
They should be tangible
They should be quantifiable and easy to track, calculate, or measure
They should show you progress
They should be timely
Let's say you have a brick-and-mortar store. Here are some KPIs based on the location, which you can set to track your company's performance:
Average Transaction Value - Measures how much shoppers spend in your store
Sales per Square Foot - This refers to your revenue versus rent cost
Inventory Shrinkage - How many products left compared to the product inventory list
In case you are an online company, you can measure your performance by evaluating your digital performance. Here are some KPI examples:
Average Order Value - Measures how much money online shoppers spend in your online store
Shopping Cart Abandonment Rate - This counts how many users fill their carts and decide not to purchase
Conversion Rate - This KPI allows you to compare your sales versus your actual web traffic
With the help of your KPI, you can monitor and quantify the success factors to reach your goals. A clear objective with comprehensible KPI would make filling out the KPI dashboard easier for the team.
However, no KPIs are the same for every business, just like how no company has the same goals. Yet, if you are looking for a guide, we have five recommended KPIs every business should consider.
Relative Market Share - Shows you how your company is performing compared to competitors within the same location; helps show the percentage of the market your company controls
Inventory Turnover - Shows you the number of units sold in a specific period
Cash Flow Forecast - Helps you assess the amount of money that enters and exits your business
Gross Profit Margin Percentage - Shows your margin in a percentage format after you deduct the total production cost
Revenue Growth Rate - Shows how much your company's income is increasing; also in a percentage format
Without KPIs, you won't have any indicators of whether your business is performing well or if it is already at stake. KPIs are a crucial success measure of any company, but like what was mentioned, each KPI would depend on your business goals and objectives.
If you need help in setting KPIs or understanding how to calculate them, you can always seek advice from business consultants or your accountants. KPIs are critical elements to your business review, so make sure to think about them well.
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