Key Performance Indicators (KPI) — What to Track and Why It Matters

Caption: The business day isn’t over. The direction just isn’t clear yet.

So often, you hear key performance Indicators (KPI) tossed around as though everyone knows what they mean and how to use them. For many owners, they think, “sure, I’ll just jump on that”. Then they ask, “What are they?” They do not realize they may already be using some.

In simple terms, KPIs are what you track in your business so you can make better decisions.

That’s it. Nothing more complicated than that.

What are you tracking in your business?

Inventory:

For instance, tracking your inventory. How often do you have to replenish something? If it is every day, the item could be in high demand or maybe you are not keeping enough in stock. Ordering often can be an added expense. A customer having to wait on an order can be very expensive; they could shop elsewhere. This helps you decide how much to keep on hand and when to reorder.

Financials:

Going along with inventory, you review your financials and you see the amount of profit you are making on one or many items and the loss on others. It might be time to make some changes. This helps you decide what to keep, what to change, and what to remove. This is one way on how to measure business performance

Customers:

We will go one step further: maybe you have a certain audience that purchases on certain days. You want to make sure you have them on hand. This helps you decide when to prepare and who you’re really serving.

All of these can be considered KPIs for your business.

Meaning and Purpose of KPIs

The following are some definitions you will find in corporate and textbooks, and they will work in this discussion.

Meaning of KPIs

• Quantifiable Measures: KPIs are specific, actionable numbers. It answers how much, how often, and how many.
• Critical Data Points: KPIs are used to indicate success for core objectives. These are points that, if they change, require immediate action. It can mean success or failure.
• Leading Indicators: KPIs assist in predicting future success or failure. These can be an early signal that something could occur. It is similar to a warning and that you need to take some action.

Purpose:

• Measuring Progress: Are you and teams efforts making a difference
• Strategic Alignment: You and your team are working toward the same goals.
• Decision Making: Data to back the decisions

Characteristics:

• Specific
• Measurable
• Achievable
• Relevant
• Time Bound

Often, KPIs are referred to as SMART criteria. When you look at the words that make up the acronym, you are looking for concrete data. You are tracking performance. You are data-driven and not looking at vague objectives.

The bottom line is, if you cannot measure it, then why are you doing it

What I have provided is textbook and corporate-speak about KPIs, but it easily fits into the life of every business owner. The KPIs have to be smart.

Using KPIs to predict outcomes

We mentioned they can help predict the future. Examples include your inventory and profit-and-loss data. As you review your books, you may see items that have been there for weeks or longer. Those items are taking up storage. That storage could be better used for something that sells faster. Maybe you are looking at the profit and loss statement. You notice one thing: what you are doing is costing more than what you are making. In both instances, you decide not to store that item and replace it with something that is selling. You are predicting that you will earn more income. All this was measured and tracked over time. Your profit and loss statement is a tool that shows the results of your activities over time.

Delivery Example

Let’s look at a different example, a delivery service. Doesn’t sound like much, but we can look at the cost. For example, let’s say you look at the length of delivery time and the vehicle’s gas mileage. If the delivery is made at 6 am, it takes 30 minutes for travel. However, if you deliver at 5:30 am, travel time is 15 minutes. We are not sure of the reasons for the difference, and they are irrelevant in this example.

The point is:

• time has decreased which is one saving
• the use of fuel has decreased, another saving.

Both indicate a decrease in expenses and greater profit. Let’s go one step further and pay that profit forward to the customer in a price decrease. Sounds like you might have lost your mind, giving away profit. But what if that customer referred a new customer, ordered more often, ordered a larger quantity, or did all of it? This could mean the profit increases more. This is all measurable. This is KPI thinking — you measured something, saw a difference, and made a decision based on it.

These are just some examples and ways KPIs can be used. Some say KPIs may be used in various businesses and industries. That’s okay. It depends on the business and what you are trying to accomplish in your business. You do not have to implement all the KPIs, just the ones that are meaningful to you.

Making decisions by using SMART KPIs

You’ll hear KPIs described as “SMART,” or keep your KPIs SMART. What that really means is that they need to be clear, measurable, and useful for decision-making.

As business owners, we need to know how our business is performing. This is not something you set and leave. This needs to be done on a scheduled basis. Some will be looked at daily, weekly, monthly, quarterly, annually and so on. It all depends on your needs to manage your business.

Some of the measures can be used in different ways. For example, selling your business. What are your assets and how much is on hand? What sells the best, what sells the worst, and what is steady.

It could be that you want to expand, but to do so, you need cash, and that can come in the form of a loan. The company providing the loan needs these numbers and must know whether you will be a good investment.

Before we bring this to an end, what about KPI mistakes?

Common Mistakes When Using KPIs

• Tracking everything: One of the biggest mistakes is trying to track everything. When you track too much, nothing stands out. You end up with a lot of numbers but no clear direction. The goal is not more data — it’s better decisions.
• Not using what you track: What about tracking something but not using it? If you are not reviewing it and making adjustments, then it’s just busy work. KPIs only matter when they lead to action.
• Focusing only on the result: Some owners focus only on the result and ignore what leads to it. Looking at profit is important, but understanding what drives that profit is where the real value is. That is where you can make changes before there is a problem.
• Giving up too early: And sometimes, people give up too early. They try tracking something once or twice, don’t see a result, and stop. That is not a real test. KPIs need consistency to show patterns and trends over time.

Putting KPI Into Practice

So, overall, your KPIs are used in many ways.

The key is not tracking everything — it’s tracking what actually helps you run your business better.

If you are having trouble deciding on what to track, you can use the decision matrix, too. After you have decided what to track, maintain consistency.