KPI stands for Key Performance Indicator. Investopedia defines a KPI as “a set of quantifiable measurements to gauge a company’s overall long-term performance.” KPIs can be very useful for both small and large businesses because they provide a calculable way to
measure the specific goals of your company.
What are some of your goals for your business right now?
Are you trying to increase your profit margin? To eliminate products with low turnover? To increase the number of return customers? All these goals and more can be tracked and measured using KPIs.
Types of KPI’s
There are several different types of KPIs. The 5 types of KPIs that I suggest to get you started are Financial, Customer Experience, Process Performance, Marketing, and Sales KPIs. Financial KPIs are related to your financials and focus on profits. Customer Experience KPIs are focused on customer satisfaction and retention. Process Performance KPIs are centered around your operational performance. This includes quality and process issues. Marketing KPIs measure the effectiveness of your marketing efforts. And finally, Sales KPIs focus on the revenue that is generated through your sales process.
Now you can see how many areas of your business can be analyzed and improved from the use of KPIs. Again, you just need to evaluate and reevaluate your goals to choose KPIs that will help you improve your processes.
Create a KPI Report
There is not a one-size-fits-all set of KPIs that are going to work for every business.
They vary between industries and even different companies within the same industry. So how do you decide which KPIs you should be tracking? Investopedia has listed a few steps you can take to help you with this process. (The comments are my own.)
1. Discuss your goals for your business. Evaluate where you are now and where you want to be in a month, a quarter, or a year. What are you trying to improve? What are your strengths and how can you build off those?
Your KPIs will generally fall into one of the following areas: Strategic, which are high-level and are good indicators of your company’s overall health; Operational, which have a tighter time frame and measure day-to-day or month-to-month processes and operations; and there are Functional KPIs, which concentrate on specific departments and their functions.
2. Develop SMART KPIs. SMART objectives are Specific, Measurable, Attainable, Realistic, and have a Timeframe.
3. Be adaptable. Your business’s needs are constantly changing. We have definitely seen this in recent years with COVID-19. The businesses that adapted were more likely to survive. Make sure you are reexamining the KPIs you are using to confirm whether or not they are still achieving their purpose.
4. Avoid information overload. This is a problem I have seen in action. When you have too many KPIs, reports, graphs, informative emails, etc. to look at, it all starts to become a blur. You lose what is important when you try to capture every single piece of data for your business. Again, focus on what is valuable to your business at the time. And that means you will have to add new KPIs and discard some old ones from time to time.
BEFORE YOU CAN BEGIN THESE STEPS… You must have data from which you can derive your numbers. Investopedia says, “At the heart of KPIs lie data collection, storage, cleaning, and synthesizing.” Having a good bookkeeper will ensure that you have accurate numbers for your KPIs on a timely basis. You won’t be able to make an informed decision if your business's numbers aren’t accurate. And what good is a KPI, if you calculate it too late and your business’s financial position and situation have already changed?
If you are interested in making more informed business decisions, you should consider hiring a bookkeeper to help you manage your numbers. They might even have some ideas on some useful KPIs to start tracking for your business 😉
Useful Retail KPI’s to Get You Started
Year-Over-Year or Month-Over-Month Sales – compares sales from a specific period to the same period the previous year
(Current Year/Previous Year – 1) x 100 = % Growth or Decline
Average Transaction Value – average amount spent by a customer for per transaction
Total Sales/Total Transactions = Avg Transaction Value
Cost of Goods Sold (COGS) – all the expenses required to make a sale of goods
Beginning Inventory + Purchases – Ending Inventory = COGS
Shrinkage – the decrease in inventory due to theft, spoilage, loss, or faulty record keeping
Inventory in Book of Accounts – Physical Inventory = Shrinkage
Quick Ratio – measures the current assets that are available to pay off current liabilities
Current Assets – Inventory/Current Liabilities = Quick Ratio
Net Profit Margin – percentage of profit made from revenue
Net Profit/Total Revenue x 100 = New Profit Margin
Days of Inventory Outstanding (DIO) – the time it takes for a product to sell from the time it is received
Average Inventory/ COGS * 365 Days = DIO
Resources used in the research done for this post:
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