In order to have a successful company, it is important for you as a founder or director to know what your goals are and track them on a regular basis so you can see if anything needs adjusting in order to meet those goals.
Relying on gut instinct will no longer cut it in today’s competitive world.
This blog post from Sean Farnell, Partner, will explore five KPIs (key performance indicators) that every founder and director should be tracking. From the number of customers to how many products are sold, these metrics provide crucial insights for business owners.
What is a KPI and how are they used in management reporting?
A KPI is a measurement of the key numbers that drive a business forward. They are important because by reporting on KPIs the management team of a business can take action to change and drive improvements in the business.
They are vital to understand what is actually happening on a daily basis in the business and also provide insights as to what is likely to happen in the future.
In management reporting, it is important that reports include a record of current KPIs but then have comparisons to historic goals. This allows you to put a plan of action in place to make improvements over the coming weeks, months and years.
What are some examples of best practices and reports?
You should focus on a relatively small number of the most important KPIs for a business owner, and best practice is not to overcomplicate the reports (at least initially). A classic example is the Balanced Business Scorecard developed by Kaplan and Norton of Harvard University.
The most important KPIs for your business will depend on what your business is, how it’s structured, and what you are trying to achieve. By pulling KPIs together from across the business you will get a powerful understanding of what is happening and the levers to pull to make improvements where that is necessary.
At Burgis & Bullock, we utilise a one page plan system for clients. This is a page which details the company’s strategic aims, current performance and its future, projected performance – all on one page.
When working on KPIs looking at historic data is important too. See if your results are comparative with a similar period and you can use that historic data to truly assess how far your business has come.
Every management team needs to keep their eyes on the numbers. And, while there are dozens of metrics that management teams want to actively manage, here are five management reporting KPIs every business owner should be tracking:
1. Customer retention
I put customer retention first because it’s the easiest one to manage but also one KPI that is the most overlooked. Figures show that 68% of customers leave not through price, product or service, but through perceived indifference.
Customer retention is all around communication and speaking to your customers in a language that makes sense for your sector or target market.
Most businesses don’t measure customer attrition rate, but it usually comes in around 20% to 25%.
Set an aggressive target and aim to reduce it to 10%. That will make a huge difference for your business.
It is much cheaper to retain existing customers than it is to go out and attract new ones.
2. Transaction volume – number of transactions per customer
This brings us back to repeat business and it really is all about securing that repeat business.
Make sure that your existing customer base understands what you can help them with and what solutions you have to their problems.
Make it as easy as possible for them to return to you and give you more business. This will keep those customers from moving away to your competitors.
Again, it comes back to communication and ensuring the right messages are being delivered to your existing customer base.
You can track transaction volumes through sales CRM, accounting systems and reporting software.
It’s a relatively easy thing to do but one that most business don’t carry out.
3. Average transaction value
Take your sales for the year and divide that by the number of transactions for the year, what’s that number? It’s your average transaction value.
Businesses will find when they do this analysis that they will have a number of customers that look and feel similar in stature, size and type of business – however, one might be paying significantly more than the other on average.
Analyse your existing customer base and assess why some are paying more than others. You should look to address that discrepancy.
Are some sales staff offering discounts that others aren’t? Get deep into the numbers and understand the action that are impacting on average transaction value.
Remember – nobody has control over your prices other than you, as a business it’s important to appreciate that fact.
4. Customer Acquisition
This is the one KPI that every business does tend to monitor. Businesses need to get more customers in than they lose to grow in a sustained manner.
How you achieve that depends on marketing strategy and a range of other factors. Your acquisition rate won’t stay the same so it definitely needs to be measured.
The acquisition rate will change over time. Look back at previous figures and assess what you were doing different then to now.
Why not go back to something you have done before if it previously had a positive impact?
Look to ask deeper questions around why that number is changing, looking at the ways it has been directly and indirectly impacted.
Customer acquisition is a vital KPI but unfortunately some businesses focus on this to the detriment of the three previously mentioned.
5. Gross Profit margin
There is no point in being fantastic at sales if what you are selling is at a loss. You have to keep a beady eye on what the gross profit margin is.
This is the difference between sales price and the cost. You don’t need to include the overheads for running the business in this calculation.
It’s key to business to know the difference between sales and direct costs, that’s the key to any business, keeping that margin high and securing more profit.
You should take action every month to assess this. Any accountant worth their salt will focus on this.
How can Burgis & Bullock help?
On Thursday, January 20 we will be hosting a free training session on key performance indicators as part of our 12 week of Financial Training for Business Owners.
We will be talking at length on seven of the main KPIs that are critical for effective management, and sustained and controlled business growth.
There will be a wide range of KPIs that are industry-specific and we will be exploring these, alongside the seven which are common to every business.
This session is completely free of charge and you can sign up by clicking here.