Are KPI’s like one of those acronyms you see on social media, but are too scared to ask about? IYKYK, am I right?! (You don’t want to know how long it took me to figure that one out.)
No worries! We’ll get you up to speed and you’ll be one of the cool kids (or business owners) in no time.
KPI stands for Key Performance Indicators. They are a quantifiable measure of how your business is performing in a specific area. They provide helpful insights for decision making and help you measure the business’ progress as it grows.
There are hundreds of KPI’s and it’s easy to immediately get overwhelmed. I recommend that you start out by reviewing just a handful each month and only set goals around 2 or 3. Once you’ve got those KPI’s where you want them, you can look at some different ones.
It’s important to make sure that the KPI’s you set goals around are in alignment with the overall goals for the business. For example, if you’re intentionally not growing your business this year because your focus is on systems and processes, then revenue growth isn’t going to be the most helpful KPI for you. Client retention would be better in that case.
The four KPI’s that I like to review every month with clients are:
- Gross profit margin – the percentage of revenue left after direct costs. What makes a good gross profit margin really depends on the industry you’re in. It also requires that you categorize your direct and indirect expenses properly to really get an accurate measure.
- Profit Margin – your net profit as a percentage of total revenue. Profit margin also varies by industry, but typically I like to see it at 15-20% for my service based clients that are paying themselves through payroll.
- Revenue per client or billable hour – this information typically comes from your billing system. I like to use it to project revenues and evaluate whether pricing is high enough to leave a good profit margin.
- Net cash flow – the cash left after subtracting all cash outflows from inflows. Since profits don’t always equal cash, we want to review this every month to make sure that we’re actually generating cash.
Need help figuring out your KPI’s? I’ve got you covered.
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