Results of a new survey have shown that small businesses are damaging their chances of growth by not using Key Performance Indicators (KPIs).
Researchers discovered that in 2015, 39% of small businesses failed to reach their growth targets, and 49% didn’t have targets in the first place! On the other hand, 74% of the SMEs that frequently and regularly monitor their KPIs hit their growth targets. Demographically, it is the younger generation who are more likely to use KPIs and also monitor them in real time.
Key Performance Indicators are a vital tool for businesses of all sizes as they provide information about how well (or otherwise) your company is doing. They allow you to identify some of your most important metrics, and provide a standardised way of determining whether or not your staff are meeting their goals, targets and objectives. The majority of KPIs tend to be financial, the most common being average revenue per customer, but they can be used to measure virtually anything.
Monitoring KPIs is a time-consuming process, so if you’re just starting the process, it’s better to begin by tracking just a few meaningful ones. KPIs must have a way of being accurately defined and measured – it’s not good enough to have ‘more sales’ as your target because you’re not quantifying how many sales you’re aiming for.
Common KPIs used by small business owners
- Sales: Most companies generate income via sales. By establishing a sales growth metric, you’ll be able to see the rate at which your revenue is rising or falling. As part of this metric, you must also take into account other factors which will affect the result, e.g. seasonal fluctuations.
- Product performance: By monitoring the performance of individual products and services, you’ll find out how well each performs. By knowing exactly what’s happening, you’ll be able to discontinue those that perform badly and concentrate your efforts on those that do well.
- Return on investment (ROI): All businesses will at some point need to invest money in projects or equipment, the most common being assets and marketing. By monitoring the ROI, you’ll know exactly how much income has been received as a direct result of that investment. In marketing, for instance, ROIs are determined by, for instance, new enquiries or likes on social media, as well as increased sales.
- Debtor lifetime: The interruption of cash flow caused by late payments can be fatal for small businesses. By monitoring how long it takes your customers to pay their invoices can help you with your cash flow forecast, as well as highlight problem clients.
- Creditor lifetime: You also need to monitor how long it takes you to pay your creditors. These KPIs will be comparable with debtor lifetime figures to allow you to avoid taking out too much credit, and with keeping on top of cash flow issues – you don’t want to pay your creditors too quickly if money from your debtors is coming in too slowly.
Small business KPIs are a vital part of your day-to-day business practice. As accountants, part of our job is to help you identify tools which will help your business succeed, whether you’re a start-up or want to expand.
For more than 90 years, HB Accountants have been providing SME owners with financial services and advice throughout the business lifecycle, from start-up, growth and exit strategy. Contact us to find out how we can help you.
