By Roman Raies, Market Analyst
“You can’t manage what you don’t measure.” – Business expert, Pete Drucker
Drucker spent his life analyzing why some organizations are effective, and others are not. While it may not sound like a flashy change, establishing a good set of standard measurements is often the pivot needed to pull off a ninth inning home run for overwhelmed businesses. Implementing KPIs in businesses that are already successful helps capture the magic touch that made them successful, giving owners a compass for successfully scaling, profiting and reinvesting.
Think your business is too small for KPIs?
When you feel like your business is already measured through and through to meet accounting requirements, the idea of implementing KPIs might sound like a redundancy, or an overcomplication. The effect is the opposite. KPIs simplify the hurdles of management while being a game changer for small business growth. It is worth taking the time to understand how KPIs can work to your advantage, even if you consider your company small enough to be managed on-the-fly.
Small Business Goal | KPI Solution |
| Engage customers | Track % of customers retained |
| Balance equipment purchases with work | Use contribution margin to know how much work is needed to recover costs |
| Profitably purchase and restock | Calculate holding costs to know true profitably of stocking. |
Why does your business need KPIs when you already track your performance through bookkeeping?
Simply put, bookkeeping reporting doesn’t happen often enough to replace KPIs. Standardized financial statements produced in accounting convey information to creditors, investors, and management in order to compare financials between specified time periods. While your bookkeeping statements show changes in performance over periods, your company’s books are likely not compiled into data frequently enough to guide day-to-day actions.
How should you deal with lead and lag indicators?
Lead and lag indicators can be thought of as a tracking system that gives you a good starting direction and confirms when you have reached your destination. Leading early signals that goals will be reached, and lagging indicators confirm that work was successful.
Lead indicator KPIs should let managers know what to expect next and help them decide if adjustments are needed to get back on track. In contracting, for example, prospect conversations are a key leading indicator. Having more conversations does not guarantee that a business will hit its revenue goal, but this does indicate that the preparation and work was put in to make this happen.
Lead indicators | Lag indicators |
| Prospect conversations scheduled | Total Revenue |
| Days Sales of Inventory | Gross Margin Return on Inventory |
| Percent of job completed | Employee performance |
When companies fail to hit the mark on lag indicators like profit, revenue and return on investment indicate that problems may reflect a bigger picture. If the team’s leading indicators show they are reaching work progress goals, but the payoffs are not backed up by lagging indicators, it may be time for a serious look at what needs to change beyond mere day-to-day adjusting.
Which KPIs does your company need?
There is no black and white rule for what makes a good KPI. Whereas accounting stays as consistent as possible for standardized comparison, KPIs to drive performance should be unique to the nature and purpose of your business. The sort of KPIs that are chosen should reflect where the business is in terms of its growth and what is the most important next step.
Take a new lawn and landscaping company, for instance. It would make sense to first focus on finding clients and establishing accounts. At this point, sales KPIs are most important. Once the company has been around longer, adding metrics on operational efficiency would help the company make the most of the business it has.
Growing company | Intermediate stage | Mature company |
| Average marketing cost per job | Variable cost per job | Travel Distance per job |
| Acquisition cost per client | Jobs in Queue / Jobs Completed | Total Resource Utilization |
As your company gets bigger and more complex, be cautious to resist the temptation to add every KPI imaginable, When KPIs are so numerous or redundant that it becomes difficult to place emphasis on what is important, this leads to “analysis paralysis”. When it comes to having effective metrics, ask if less is more. Making sure managers have understandable KPIs goes far in helping them be proactive when something is off. Resources like Cogent’s Discovery Process help companies discover which KPIs they need to use to be financially healthy and profitable.
