What are KPI’s and do you need them?
KPIs get thrown around a lot whenever you’re talking to a business strategist, business coach, CFO, or someone who worked in corporate finance, but what are they and does your small business NEED KPIs?
In this post, we’ll cover
What is a KPI
What they can do for your business
Where to start if you’ve never mapped a KPI before
What is a KPI?
A KPI is a Key Performance Indicator. It’s a metric that helps you gauge if your business is on or off track.
There are 2 kinds of KPIs: leading indicators and lagging indicators.
Leading indicators are metrics that show where you might land in a given time period
For example, this can be the number of leads in your pipeline and that can help you see where you might end up with Gross Revenue for a particular month, or quarter.
Lagging indicators (where most financial metrics live) are metrics that show you what already happened in a given time period. For example, Gross Revenue, Gross Profit and Net Income are all LAGGING indicators of what happened already and are showing you the health of your business .
Here’s a few examples of both leading and lagging indicators. I have a google sheet full of 258 KPIs that I keep on hand when we’re setting up clients with KPIs for the 1st time. And NO You don’t need that many for your business to have a robust KPI dashboard.
Leading Indicators:
Email List Growth Rate
New Leads per month
Net Promoter Score
Booked Discovery Calls
Cost per Lead
Breakeven Point
Accounts Payable or Receivable Aging summary
Lagging Indicators:
Revenue per sq foot
Revenue per employee
Gross Margin by revenue stream
Return on Equity
Return on Capital invested
Customer Acquisition Cost
What does it mean for your business to have KPIs?
When I see business owners go from no KPIs to a few KPIs, the biggest change I see is that they are focusing on LESS things which helps them grow the business over all. It gets them out of the weeds and onto the larger, bigger, more audacious goals.
There are so many business owners that are amazing at tracking every dollar in and out of their business and realistically that only gets you so far. You can’t track every dollar and stay focused on an overall bigger goal. It's not that those dollars don’t matter, they do, but the KPIs transition those owners from a detailed, stressed out focus on every mistake to looking at the larger picture and seeing better progress over time. Or on the other side, catching big mistakes before they happen.
I have more examples on this than I could fit in one post, so we’ll go with one example that sticks out. A client that was tracking weekly incoming customers rather than focusing on the deeper metrics.
She’d never had a KPI anything before to get her started. We looked at Labor as a percent of Revenue. Historically, it fluctuated between 43-45% and based on the overall business model and strategy, I set a target with the team to get it to 40%. Now to be clear- this had nothing to do with cutting headcount because those metric variables are not only related to cost of payroll, the biggest lever was increasing overall volume and keeping headcount and the schedule the same. My much more sneaky goal was to get the team to focus on that number instead of the weekly or daily customers in the door, because that’s a metric you can’t control or make changes to after it happens.
When you’re able to back up a bit and think - how do we get labor to 40% of revenue? you start to see the problem is “how do we get more revenue per day, per hour, per squarefoot, per customer, etc…? And the real issue is with revenue generation not cost cutting.
KPI’s create clarity and shared goals across your team. They allow you as a leader to get out of the weeds and focus where you need to focus. The other amazing thing with KPIs is that you can (and it’s in your best interest to), delegate the management and activities around those KPIs to your team. It shouldn’t simply be a report to you, that only helps inform. To really make an impact on your business, those KPIs need to be managed by the team members that are taking action to improve or meet the KPI targets you’ve set. They also should be the metrics that indicate you have the right people in the right seats who are doing what they said they were going to do.
For example, if you set a KPI around cost per lead, that ideally should be delegated to whoever can impact that cost per lead. They should be responsible for tracking, reporting and adjusting to that KPI. Their performance and development should also be tied to their KPIs. This is how you’ll know what’s going on in your business. When you have a very small business (under $2M in revenue or under 20 people) this sometimes gets muddled, but it’s beyond helpful and necessary to scale business well when everyone knows what metrics they're aiming for.
Where do you start if you’ve never mapped a KPI before?
Where do you start? Let me tell you one thing before I get into all that- if your business is under 2 years old, or small or simple - you may not have the data you need for a full list of KPIs to be impactful. If you’re struggling with product market fit, or low revenue, or there’s not one clear product you're offering in your service business, it can take some time to get clear data.
Even with that said, there are common financial KPIs that you can track no matter what.
The 3 that I would choose regardless of where you’re at in your KPI Journey are:
Gross Revenue Month over Month Growth % (this is how is your revenue changing month over month)
Ending Cash Balance every month (is your cash going up or down, HINT- it should go up, unless you’re investor back with a big starting cash balance)
Net Income Month over Month Growth % (don’t get into EBITDA for a bit, using Net Income you’ll get a great handle on if you’re profitable or not and how that changes over time)
I can’t write a blog post about EVERY financial KPI, so I’m going to leave those up there and say - hire a CFO to help you create a Dashboard to get a full set of the financial KPIs that are right for your business.
Let’s get a little more specific here, what do you need for your business? What are your goals? What metrics inside your business are going to show if you’re reaching them or not.
For this example, I’m going to share my own personal KPI metric that has shifted how I do business.
I started this version of my business in 2020 and didn’t really track any KPIs beyond revenue and take home pay. That’s really all I needed. As I grew, I got more data and wanted more details. In 2022/2023 I started tracking two things: billable rate per hour and non-billable time vs billable time. Something major shifted… my billable rate per hour shot threw the roof. I was able to get super clear on how to offer products and services that our customer valued and that were priced correctly for the value we offer and all the work that goes on behind the scenes.
In 2024, I added another metric: total owner compensation. Because I’m an S-corp, I pay myself a W2 and take draws, and as a business owner some of my “would be personal expenses" can be paid for by the business and I wanted to know what that number was. I had a target in mind so I started tracking. Again, once I focused and set-up my financials and reporting to keep me informed, I could start to see patterns on where I spent my time and how that reflected in my total owner benefit. It also helped me see what value the business was to me personally vs just managing the cash in the bank for the business and personally.
Lastly, the biggest reason my KPIs matter to me is because it keeps me off the emotional rollercoaster that is closing new contracts. When you get out of the weeds of living or dying by the next big sale, your life is calmer. I can see that I’m living to the goals I created even if that new contract doesn’t get signed or leads are slow for a few weeks. I know the system is working and it will keep working. I don’t have to come up with some new big idea every month just to get a new client in the door because one business got sold and we have a gap in revenue. I know the system is there because I’m tracking a well rounded list of KPIs.
I’ll leave you with this: KPIs are how you create the calm you need in your business.
Clarity brings calm.
KPIs also demand your data clarity is there, you can’t measure what you can’t track and if there is a way to get the kick in the butt you need to create the tracking (*cough* good monthly bookkeeping*), KPIs are the thing that can get you there.
What are the KPIs you use? What else do you want to know? If you want my list of 258, send us a note (hello@financefightclub.com) and I’ll get that over to you ASAP.
