Last year, I decided to be an assistant Upward basketball coach for my 2nd grade twin boys’ team. They didn’t keep score on the scoreboard, but my players kept asking me who was winning. Of course, I told them that it didn’t matter and the most important thing is that they learn how to play the game. That didn’t stop them from trying to keep score. This year, I am coaching in 3rd grade, and they do keep score on the scoreboard. Our team was losing by 20 points, so the referee asked if I wanted to turn off the scoreboard, but I told him “No”. It was embarrassing, but the score is a strong motivator. At the time, I told the two players on the bench that we needed to just try to get 8 more points. We stopped focusing on how much we were losing but instead on just getting one goal at a time and we ended up scoring 12 more. We didn’t win the game, but we won the 2nd half.
Keeping score is sometimes not fun when you aren’t winning or your business is not growing as fast as desired. When building a financial forecasting model for your business, it is best to determine the key performance indicators (KPIs) that you want to track and focus on them. In my last blog, Flying Blind, I explained the value of having a good forecasting model to help you maneuver throughout the changing business environment. KPIs are a key component of this forecasting model because they are your score. They help you know if you are improving and can provide an additional motivation and excitement for your team.
I am not sure if I have convinced you yet. I think for some of you entrepreneurs, the acronym “KPI” puts you to sleep. Therefore, I have come up with 5 reasons that you need to review KPIs regularly in your business.
1. If you can’t measure, it isn’t a goal.
I wrote about SMART (Specific, Measurable, Actionable, Realistic, and Time-Bound) in a previous blog post called “How are you Doing on Your 2016 Goals?”. One of the key components in setting and meeting your goals is to make sure they are measurable. I am guessing that you have a revenue and profit target, but is that specific enough? Once the revenue is broken down by product, service line, customer, location, or any other profit center, it is a KPI that should be measured.
2. How do you know what you are doing today is relevant?
I was recently listening to the EO Fire podcast featuring Jordan Harbinger. He mentioned that when we focus on what is relevant, then we know we are doing the activities that are most important to hitting our goals. This seems kind of simple as I write it, but it is also profound. If we have a goal to hit such as a certain amount of new revenue but we fill our day up with distractions that don’t help us achieve that goal, then we can get into trouble. If we are trying to get 5 new clients, then we should measure contacts, pitches, RFPs, referrals, close rate, etc. so we can adequately measure what we are doing to hit the new revenue goal and adjust if necessary.
3. I didn’t make this up.
Measuring and reviewing KPIs is nothing new. In fact, it is a best practice among all kinds of businesses. Bernard Marr wrote a LinkedIn post back in 2013 called “The 75 KPIs Every Manager Needs To Know”. It is a very thorough list broken down by financial, customer, marketing, operational, employee performance, and environmental categories. I wouldn’t advocate every company tracking all of these, as they aren’t applicable to every industry or goal. Maybe look at 10 of these metrics along with other measurements that are very specific and relevant to the goals you want to reach this year.
4. It’s fun.
I know that I am a bit of a numbers nerd, so this might seem like a ludicrous statement to you. Why do I say it is fun? If we actually have a benchmark and we communicate this to our team and we exceed it, how much fun is that? It is so much more fun to celebrate hitting this milestone that everyone set out to hit. Some of you might say that if you don’t hit a goal, then it is depressing and could hurt employee morale. That might be the case in the short term, but if you have laser focus and work hard and hit the goal later, how much better is that for morale?
5. Keeps you out of trouble
Measuring KPIs and comparing them to prior months or industry benchmarks can point you in the right direction or keep you from running into a financial challenge. If you have a loan with bank covenants, then you have KPIs that need to be measured and forecasted. If working capital or the debt to equity ratio is forecasted to fall below a bank covenant, then you know an adjustment needs to be made or you will be in a cash crunch.
In a service oriented company, what if you are trying to decide on hiring an employee but you notice that revenue per headcount is dropping? This trend might indicate that there are inefficiencies in place or client contracts that might need to be amended due to increased demands by the client.
If you notice that your average days of collection are increasing, then you know you could be in for a cash challenge. Maybe something has changed in the collection process or a large client is running into cash problems, so it is important to address these issues quickly.
In summary, KPIs in a financial model are important because they ensure we are measuring our goals and spending time on relevant activities. Further, utilizing KPIs is a best practice that can serve as a fun way to boost morale and keep your business out of trouble.
So far, our Upward basketball team has lost the first three games, but we are still keeping score and we are adjusting our tactics to improve each week. The other teams are stacked and are taller, but we will keep working hard. Just think how great it will be when we win.