How to Use KPIs vs Metrics To Make Better Business Decisions
Ever feel like there are parts of your business where you’re throwing spaghetti on the wall and hoping something sticks? Maybe it’s in your marketing, your customer onboarding, your business budgeting or some other aspect of your small business.
Whatever part of your business is currently frustrating you, chances are that it could be made more effective by tracking the right KPIs and metrics. If you’ve heard the term “KPIs” being thrown around but have no idea what they are or how they can help your small business, you’re not alone.
Many small business owners either aren’t familiar with KPIs or don’t use them to their full advantage. As a result, they make decisions without considering data that could save them significant amounts of money, time, and stress.
This article will help you understand what KPIs are, why they’re key to growing your business successfully, and how they differ from other metrics in business.
After reading this article, you’ll be able to select the best KPIs for your business to make well-informed and strategic decisions that benefit your company (and your clients) in the long-run.
What Are KPIs in Business and Why Should You Use Them?
KPI stands for Key Performance Indicator.
Key Performance Indicators (KPIs) are measurements to evaluate performance in the things that are crucial to moving your business forward to achieve the goals you set.
Most successful business leaders use KPIs to:
Have an early warning system to indicate when important business activities or tasks are being neglected or not meeting deadlines
Uncover bottlenecks in processes and systems that are key to driving revenue or minimizing costs
Reveal patterns and data to improve services, products, and offers to maximize customer satisfaction or expand into new markets
You should use KPIs if you want to be able to track progress toward short-term (weekly, monthly, quarterly) and long-term business goals (annual and beyond).
Doing this will allow you to feel confident knowing that the hard work you’re putting in is moving the needle forward in your business. And if the KPIs indicate that something’s off track, you’ll know where to start making adjustments in your strategy or processes in a timely manner.
What’s The Difference in KPIs vs Metrics in Business?
Metrics are simply measurements that are used as a tool to gauge the result of processes or actions. They can be used in any aspect of your business to indicate past performance.
KPIs are actually a type of metric that allows you to estimate progress toward certain business goals based on the things that are most crucial to support those goals.
Think of the two as leading and lagging indicators. Your KPIs are a leading indicator to let you know whether you’re on track to achieve the goal you set in any of your business metrics. Your business metrics show how well you’ve done after the fact.
Let’s look at a brief example to make this more concrete…
KPIs vs Metrics Example
Let’s say you’re in the early stages of running a design company. A key driver of success for you might be generating 50 new high-quality leads every month so you always have a pipeline of new customers to serve with your design services.
The amount of leads generated in any given month is a key performance indicator (KPI) that drives revenue (one of the top 7 financial business metrics you should be tracking monthly).
So while you’re aiming to increase the metric of revenue, the amount of leads you generate is a KPI (leading indicator) to let you know whether you’re on track to meet the revenue goal or not.
How to Set KPIs in Your Business
There are three simple steps to successfully setting and integrating KPIs into your business.
Know which activities are most crucial to driving outcomes in your business
What are some of the activities that must happen every week, month, or year for your business to generate revenue and be profitable?
Take a look at your Revenues in your Profit & Loss statement and think about what all has to happen for you to drive sales. Is it active marketing or advertising to generate leads? Getting testimonials or referrals from happy customers? Or perhaps growing your salesforce to reach new markets?
As an example of KPIs for each of the above, you could set KPIs for the number of:
New leads generated from your website every week
New testimonials or referrals from customers every month
Leads generated per sales representative every month
When you’re struggling to make a decision in your business about where to allocate your resources, refer to your KPIs and consider what will drive the needle forward on each of them.
Use SMART business goals to set SMART KPI goals
You may have heard of the importance of setting SMART goals - in business and in life. SMART goals are specific, measurable, achievable, realistic, and time-bound. KPIs are a great tool in helping you set specific, measurable, and time-bound goals so you can optimize your business processes and systems to achieve these goals.
It’s one thing to say you want to increase revenue (vague goal with no timeline). It’s another thing to set a goal of increasing revenue from your core service (specific) by 20% (measurable) over the next quarter (time-bound).
Once you know what business and financial goals you’re trying to achieve, you can then work backwards to figure out which activity will get you there fastest and set a KPI goal accordingly.
🎧 Not sure how to set SMART financial goals in your business? Listen to this episode of Profit is a Choice podcast to help you understand how to set and revise your business financial goals.
Decide how and when you’ll track your KPI goals
Once you’re clear on your KPI goals, you’ll need to have an easy, repeatable process to track them. If your KPIs are also part of your larger business metrics (such as revenue), you might decide you’ll use your current accounting software to track sales once a week.
Since KPIs can help you make better business decisions, you should refer to them as needed when you’re
struggling to decide where to spend your time or money to increase profitability in your business.
You should also decide when to review your KPI goal in light of your overall business metrics. I personally like to look at my numbers for the prior month every first week of the new month. You can set a reminder to look at your KPIs at a predetermined time and day every week. Or you might even assign someone on your team to send you a report on your KPIs for you.
Example of Using KPIs to Improve Profitability
Let’s say you generated $100,000 revenue from your core service (a $10,000 consulting package) last quarter.
Going back to the SMART goal above, you may be looking to increase revenue from your core service by 20% over the next quarter. To do this, you know that you need to generate $120,000 in revenue this quarter (so $20,000 more than prior quarter).
Having this financial metric goal allows you to ask yourself and your team: what needs to be done to generate an extra $20,000 in revenue from your core service in 3 months?
It might mean selling 2 more consulting packages at $10,000 each.
Or it could mean restructuring your core service to increase the price of your consulting package to where you only need to sell one.
Or vice versa. You could create a smaller ticket consulting package but sell it to more people.
However you decide to get there, set a KPI that you can track to ensure that the decisions you make daily in your business are in alignment with this goal and with your business mission.
Leverage Business Tools to Achieve Your KPIs and Make Better Decisions
In summary, KPIs are metrics that drive success in the aspects of your business that are key to making progress in your most important business goals.
To set your KPIs, you need to:
Know which activities are most crucial to driving outcomes in your business
Use SMART business goals to set SMART KPI goals
Decide how and when you’ll track your KPI goals
Now that you know which KPIs to track, you’ll be better equipped to make business decisions more strategically than before. Your success in achieving your KPIs will translate into improved revenues and profitability.
Having a hard time keeping up with the most important metrics in your business or find spreadsheets and Quickbooks too confusing to look at? Click here to watch a demo of how Metrique provides a simple visual solution to tracking your most important business numbers in one spot so you can grow your business faster without overwhelm.