Finding the Key Metrics for Your Small Business
What are the key metrics that you watch in your small business?
For many businesses, that question is tricky - they’re busy trying to manage multiple tasks, let alone keep an eye on Key Performance Indicators (KPIs). Sometimes it’s a question of “what should we be measuring?” There are literally thousands of possible metrics, and it’s important to be monitoring those that matter.
While many small businesses aren’t tracking any KPIs regularly at all, still others are tracking things that aren’t of real benefit to their company. This can mean they simply don’t see the results they could be getting.
With that said, let’s take a closer look at key metrics - what will be important to your business?
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The importance of measuring the right things
Most people understand why it’s important to have metrics or KPIs for your business. It can be summed up by the popular phrase “what gets measured, gets managed.” Metrics keep your business on the right path, so be sure to implement the right metrics.
Michael J. Mauboussin tells a story for an HBR article about taking on a project for a financial services firm. The aim was to better understand the company’s profitability, which was a core goal.
He describes how the company had hundreds of clients, but a particular mutual fund firm was their largest client, and took up more resources than any of the others. Basically, the company was giving the mutual fund client extra attention to ensure their happiness. When Mauboussin ran numbers to look at profitability per client, they were startled to find that their largest customer was their least-profitable account. Clients who fell more toward the middle of the group and took up less resources were the most profitable accounts.
“What happened? We made a mistake that’s exceedingly common in business: We measured the wrong thing. The statistic we relied on to assess our performance—revenues—was disconnected from our overall objective of profitability. As a result, our strategic and resource allocation decisions didn’t support that goal.”
That’s the bottom line of why it’s so important to measure the right things - you need a clear link to support the goals of your business. If you’re focusing on metrics that don’t directly add to those goals, you’ll find it difficult to achieve them.
Your key business metrics should directly add to your company goals
Benefits and properties of good KPIs
KPIs provide measurable values and paint a clear picture of how your business is tracking. That term “measurable” is key - your metrics should be things that you can put clear measures around, otherwise it’s difficult to track progress.
Think about the story of the company that was sinking a lot of their resources into the one major client - the dollar value on the revenue might have sounded impressive, but when you look at it as a measure of profitability and take all those resources into account, you realize that the revenue isn’t so impressive after all.
This raises another important point about what makes a good KPI - it should be meaningful. This means that it should be something of direct importance to the goals of your company. If you were to choose metrics purely based on what other companies are measuring, they might not make sense, particularly if their overall goals are different. For this reason, it’s a good idea to have clear goals set first, then figure out the best metrics to meet them.
Managing your business and team
If you’re a solopreneur, or a founder with just one or two employees right now, you probably juggle so many things that it’s challenging to keep track. How do you get clarity about what the most important tasks are to move your business forward?
KPIs can provide you with vital clarity. You can prioritize based on measuring and tracking the things that are giving your business traction.
If your business is slightly bigger and you have a few team members, then KPIs can also play a key role in helping you to manage them. Well-chosen KPIs help to provide clarity to your team members, so that they understand exactly what is expected. If you were to provide a vague goal of “we need more sales,” it’s easy for someone to argue that they did meet that goal, even if your results aren’t where you’d like them.
A specific target such as “50 sales per month” is a much clearer goal - either it was met, or it wasn’t. Accountability is an important benefit of clearly defined metrics.
Another benefit of keeping track of the right metrics is that you paint a clear picture to notice trends and accurate predictions for future needs. This is being proactive, rather than simply reacting to data.
Consider this point from an CFMA article:
“CEOs and CFOs who manage their businesses primarily based on the financial statements may run very successful companies; however, without forward-looking indicators to inform them, it’s likely that they live their entire lives managing through the rearview mirror.”
In this sense, having the right KPIs in place offers a competitive advantage. They can inform your decisions so that you aren’t being reactive or deciding in haste.
Limitations of KPIs
KPIs are great when kept in perspective with the overall picture of the company. In the first example, the company was looking at the revenue generated by clients, rather than the overall picture, which showed that in fact, the resources sunk into the big client ate up profitability.
From another perspective, let’s say you are incentivizing your sales team, with the number of sales being a key KPI. What if they did make a lot of sales, but all of those were low value? Perhaps it would be better for the company if they put more effort into larger accounts that spend more money. (With an eye on that profitability, of course!)
KPIs provide you with important tracking towards targets, but it’s also possible that people don’t become so focused on those things, that they miss other important things that aren’t captured by the data. Data can be misleading if viewed in isolation, so it’s crucial to maintain that overall picture of the company when viewing it.
Your metrics should be tracked as a means to an end, not the overall end goal. If you were hung up on revenue per client, it would be easy to miss profitability as a target. For this reason, KPIs should also be seen as important, but flexible subject to review. They are a tool for achieving your key business goals and may need to be adjusted to get you there.
Finding your key metrics
As we’ve established, your key metrics should always be directly relevant to your overall company goals. But where should you start? If you take a quick search online, it is awash with metrics and debates over the relative merits of all types. It can be somewhat overwhelming just trying to establish your own.
If you’re in a position where you simply don’t know where to begin, here are a few steps to clarify your metrics:
- Understand the stage of your business. Your business goals evolve with each stage, for example, if you’re a new startup, establishing a customer base and gathering feedback might be key early goals. Businesses a little further along will look at things like customer churn or retention.
- Establish goals that make sense for your business stage.
- Examine which categories will contribute to your goals (for example, marketing, sales, finance). These will depend on your capacity as a business too - if you’re scraping just to meet customer service demands, you’ll probably struggle to establish a new marketing program, for example.
- Establish metrics under those categories.
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For any business that would like to grow and scale successfully, tracking key metrics is an important step.
Metrics are like your “sense check,” they help you to recognize patterns and to understand whether your business is on-track to achieve your goals.
Choose your metrics and choose them well. To summarize, your metrics should be:
- Relevant to the goals of your business
Remember to look at KPIs in the wider sense of your business. Do they still make sense? Is there anything important that your data isn’t capturing? Your metrics will help if they remain useful to your business.