4 ways to use KPIs to gauge the health of your business
Conventional wisdom tells us that tracking key performance indicators (KPIs) is the best way to gauge the health of a business – and, in many ways, that’s true. KPIs can help a CEO know whether their company is performing well, operating efficiently, and meeting its strategic goals.
The problem is, KPIs don’t always tell the whole story. In fact, if you’re not tracking the right KPIs, they won’t tell you much about your business at all. KPIs should give you a view of the trajectory of your business, and when they change, you can predict long-term impact. Consider how something such as tracking changes in customer referral rates can be a predictor of revenue down the road.
Take your reporting to the next level by being selective and thoughtful about the KPIs you choose to measure and how you look at them. These four recommendations can help you gain greater insight into your business.
1. Think critically about the KPIs that make sense for your business.
What does your business depend on for its success? The answer should influence the specific KPIs you’re monitoring. For example, if on-time delivery is your company’s main competitive advantage, then that should be your leading indicator for business performance, while delivery, shipments, and backlog metrics can serve as secondary indicators. Some of these metrics “may not even represent your total business, but they can help show you where the business is trending,” says Connor Lokar, an economist with ITR Economics.
2. Calculate rates of change for a deeper understanding of your most important KPIs.
In the same way that measuring someone’s blood pressure can detect whether they have a heart problem, measuring rates of change can serve as a valuable diagnostic tool for your business.
To measure your rates of change, take your key metrics and add in trend lines for rolling 12-month percentage change and rolling three-month percentage change to calculate the velocity of the change. “A lot of times, this is an eye-opening process for companies,” says Lokar. “It’s a different way of looking at your numbers and gives you context for why something is happening right now.”
3. Benchmark your data against external factors.
Along with helping you understand the volume and velocity of your most important KPIs, rates of change metrics offer a point of comparison with changes in market conditions.
After you’ve benchmarked your current performance against past performance, take the next step: Compare your data with external metrics, which might come from competitors in your market or from an industrial production index. Then, overlay trend lines between the two.
“Chart it out and plot it,” says Lokar. “See where you are now, how you’ve done in the past, and how you’ve responded to different periods in the economy when things have picked up or slowed down.”
4. Give everyone ownership of your KPIs.
Share your KPIs with everyone in your organization – not just senior leaders – and reward employees for contributing to KPIs that drive growth. To make it easier for everyone to track and review KPIs, invest in tools such as an online dashboard and encourage them to use it on a daily or weekly basis.
In today’s economy, understanding the rates of change in your key metrics is critical to developing appropriate strategies for your business to mitigate risk and capitalize on opportunity.