One of the most relatable examples of a key performance indicator (KPI) comes from being a parent. It is amazing how preoccupied kids are with growing up. This is evidenced by how frequently they measure themselves, followed by predictions on if they will surpass mom and dad in height. As a business owner and investor, KPIs go from demonstrating how much my children are growing to how effectively a business plan we’ve put into place is functioning.
A key performance indicator (KPI), also known as a predictive metric or leading indicator, is used as a way to evaluate what factors are at play in making a business successful. On the flipside of that coin, KPIs can also show you where your company needs to reassess its business plan in a particular area.
For example, if you were to appoint Net Revenue on a single product as a KPI, you would then be able to observe trends or patterns on that product’s sales to determine if the product is being marketed effectively or well-received by your customers.
A related business KPI, the Cost of Goods Sold, can help you establish the actual production costs of your merchandise. With this number you can then have a much clearer perspective of your true profit margins, and better understand if you need to increase or decrease your markup to stay competitive.
Key performance indicators should be tracked for one reason: to ensure your company is meeting its goals. Essentially, KPIs help you truly gauge your small business’ performance through measurable data points that reflect deviations or adherence to your desired business pathway.
This is a subject we emphasize a great deal at Evolution Capital because it intertwines so seamlessly with the first and second pillars in The Five Pillars of Business Freedom (SM) and our own success as entrepreneurs.
In our second pillar, we focus on not only having a plan, but having a plan that works for your small business. Key performance indicators should always be a big part of this plan, as they help you understand if you really are making some headway on your goals, or just spinning your organizational wheels.
When you have KPIs set up to show you trends and patterns occurring in certain strategic areas of your business, then you’ll know just how well your plan is working.
The best way to stay apprised of your KPIs is through a financial dashboard, which organizes and displays in real-time the key metrics you’ve selected through charts and graphs. In this way you can instantly look at a variety of figures that directly correlate with your business goals and determine if you’re on the right track.
One of the mistakes you as a business owner can make, however, is not paying attention to these numbers on a regular basis. Maybe you’re too bogged down in running the company day-to-day or you don’t yet understand the importance of knowing your business’ financials in finer detail.
This is where the financial dashboard makes things much easier for a business owner who is more of a visionary than a financial expert. By constantly being aware of your predictive metrics, you prepare yourself to intelligently tackle any issue, and you are given the opportunity to build up high-performing areas that keep your business thriving.
Want more information on The 5 Pillars of Business Freedom (SM) and how to accelerate your company’s growth? Listen to our radio show The Second Stage for tips on becoming a thought leader in your industry, fixing your financials and getting on the road to small business success.
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