I think you’ll agree with me when I say: there are times when it can be really hard to know how your business is really going.
But does this have to be the case?
Well, it turns out that you can design performance metrics for your business by following a simple six step process. By tracking performance metrics that cover all the vital areas of your business, you can measure success and accurately assess how you’re performing.
In today’s post, I’m going to discuss what performance metrics are, why you need them and how to use them, then I’ll show you exactly how you can develop performance metrics designed just for your business.
What are performance metrics?
Think of performance metrics like the gauges on your car dashboard. In your car the gauges show your speed, how many revs your engine is doing, what gear you are in, and how much fuel you have left. Performance metrics play a similar role for your business.
At a point in time your performance metrics show how you are performing, recent improvements or declines in performance and the health of your business. They are an easy way to quickly find out how your business is performing in key areas. A bit like quickly glancing at your dashboard as you’re driving.
But how, exactly, do you measure performance? And what numbers should you track?
Read on to find out how.
Why does your business need performance metrics?
Performance metrics are a key tool for any small business owner. This is because they can be used to identify opportunities and threats to your business and areas of strength and weakness. With this knowledge you can then come up with plans to improve your business and streamline your systems and processes.
To keep everything running smoothly and at an acceptable level of financial success.
Performance metrics can help you answer these questions:
- Where are you outperforming? Where should you double down?
- Where are you underperforming? Where should you focus your attention?
- What key areas are at risk? What needs to be fixed?
The answers to these questions can be used to grow your business and increase your profits. They also help put strategies in place for running your business more smoothly. You can plan for improvements, adjustments and any changes to the processes your business has in place to meet various goals.
How do you use performance metrics?
You should keep a simple table containing your key performance metrics.
This table will be updated weekly, monthly, quarterly or yearly depending on your business and the metrics you have chosen. That’s all most businesses need, although you can also use a performance dashboard built into your accounting software if you want.
When looking at your performance metrics each period, you should watch for changes, trends and benchmarks. Here’s a breakdown of the three:
- Changes in key metrics: Big changes or swings in any performance metric indicates that something has happened in your business or market. Seeing that your customer acquisition cost has doubled is an important reminder to look into your marketing campaigns to make sure they are still effective. Once you notice a change, positive or negative, you should deep dive into it to look for the reason.
- Trends over time: You’ll want to know what’s changing over time in your business or market. If profitability is slowly declining over time, it is something you want to catch and have a chance to put in place measures to improve profitability. Monitoring trends can point to areas that need attention before they become bigger problems.
- Performance relative to benchmarks: You’d want to know if the typical profit margin in your industry is 20%, and you’re earning a 10% margin. Tracking your key performance metrics against industry standards can tell you how you’re performing relative to competitors, so you can quickly identify areas for improvement.
When there has been a positive or negative change, a trend is emerging or performance lags your benchmark, you’ll want to spend time looking into why this pattern has happened. From there, you can come up with a plan to improve your performance.
Six steps to choosing performance metrics
As we have seen, small business owners should track performance metrics because they quickly provide valuable information to your business. However, there are so many different metrics and areas of your business you could choose to track.
For most small businesses, I recommend tracking just one or two performance metrics under six categories:
- Cash Position
- Employee Satisfaction
Step 1. Choose a growth metric
Growth matters because it is the central purpose of business. To increase financial resources, serve more customers and hire more people. Growth is a sign that value is being created for the business owner, employees, customers and society. But especially for small businesses, it is important to track growth just in case it is negative. Keeping growth on your dashboard will quickly alert you to major issues that need to be worked on.
Example metrics: Revenue growth, profit growth, growth in number of customers, growth in volume of transactions.
Step 2. Choose a customer metric
Customers are the number one reason for a business's existence. Without customers, there would be no business. Customers vote with their feet, and they can be fickle. What better measure of your business than your customers. If your product or customer service is not up to par, then you will find out very quickly through customer behavior. That is why it is vital to have a customer metric on your performance dashboard.
Example metrics: Customer satisfaction, customer NPS, number of complaints, average online rating, positive to negative customer feedback ratio.
Step 3. Pick a metric to measure economics
It is no use to sell $100 notes for $50. That may sound like an obvious comment, but a lot of businesses have subpar economics. But even more important, the trend in economics is vital to track for businesses that have razor thin margins. The way to do this is to keep track of profitability metrics on a customer level. Tracking gross margins (profit after cost of goods sold is subtracted from revenue) and customer acquisition costs is a great way to stay across the economics of your business.
Example metrics: Gross margin, customer acquisition costs.
Step 4. Choose a profitability metric
This means the bottom line. Profit after all expenses have been accounted for. This measures how efficiently your business turns revenue into profit. The life blood of every business. So profitability has a place as a metric on every performance scorecard.
Example metrics: Net profit margin, EBIT margin, return on capital, return on equity.
Step 5. Pick a metric to track cash
Cash position matters because, well, try running a company without cash. All experienced small business owners know that cash is the number one item to track at all times. You’re probably already keeping a close eye on your cash position, but it also earns a place amongst your metrics on your performance scorecard.
Example metrics: Cash balance, cash burn, burn multiple, free cash flow.
Step 6. Choose an employee metric
Try running your business without employees. Impossible. That’s why employee satisfaction must be included in most small business performance metrics. It costs a lot of money to replace employees, and can cause disruption to your business while you do. Keeping a track of leading indicators of whether your employees are happy is vital.
Example metrics: Employee satisfaction, employee NPS, employee turnover rate, average online ratings (e.g. Glassdoor rating), positive to negative employee feedback ratio.
Summary: Performance Metrics
Almost everything that matters about the performance of a small business is captured in these six areas and the associated metrics.
Here’s an example scorecard suitable for many small businesses:
As you can see in the example, the performance metrics showed a 14% decline in revenue in March, which we can see might have been driven by 15% of employees leaving the business. This scorecard allowed a speedy identification, diagnosis and fix to the issue.
We can also see that in June the customer rating fell dramatically. This may have been caused by the solution to the employee turnover problem (training, maybe), but this business owner should spend the time to diagnose the issue and make plans to right the ship with customers.
Of course, the performance metrics you choose will be dependent on your line of business.
Following these six simple steps is a surefire way to develop performance metrics that will help you keep a track of your business performance and make improvements.
Choose one or two metrics that track your revenue, customers, economics, profitability, cash and employee. Then keep an eye on these metrics every period (week, month, quarter or year) and act when necessary. It's that simple.
Before you go...
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