The simple measuring tool that will allow your business to flourish – KPIs 1

Susan
By Susan October 3, 2012 11:54

The simple measuring tool that will allow your business to flourish – KPIs 1

 

Do you use KPIs in your business? If you don’t, you really, really should!

A KPI, a Key Performance Indicator, is a vitally important tool for businesses. It creates a non-emotional, quantifiable, results-focused way of looking at your business. It allows you to gather a wealth of information about how well your business is doing. And it can often be very revealing.

Most importantly, KPIs can direct your efforts: they are an indispensable foundation for action!

Let’s start with revenue and margin. (read about cashflow and the sales cycle here, and how to choose KPIs here)

 

KPI 1. Revenue

 

Now the first KPI I would advise you to look at is, obviously, revenue, the amount of money coming in.

I always bring this up at entrepreneurship presentations and ask – Do you know exactly how much money is coming into your business, compared to last month, and the month before that? Compared to the same period last year? Have you been able to pick up patterns in your revenue? If you don’t have this data to hand, then now would be a good time to pay closer attention to this.

And not just revenue in general, either, but – revenue per customer or customer group. For example, if I do business with individual businesses, how much revenue is each generating, as a percentage of the whole? If I do business with retail or many clients, how much revenue is generated by the 25 -34 age group or women or urban people or any other classification that could be significant? Do you know whether they are returning customers, or first-timers?

Knowing the amount of revenue per customer will allow you to check whether you need to adapt your behaviour in one very important respect:

Are you sure the amount of time you are spending on a customer reflects the amount of revenue you are raising?

You must certainly have heard of the Pareto Principle, or the 80/20 rule: 80% of your results will come from 20% of your efforts; 80% of your revenue will come from 20% of your customers – and 80% of problems and complaints will come from 20% of your customers, very often NOT those who bring in 80% revenue.

In other words, those customers who tie up 80% of your time with customer service and problems and endless emails and phone calls are perhaps not those who keep your business afloat. If you instead shift your focus to the 20% who bring in a lot of revenue – and very often happen to be pleasant people, who continue to buy from you because they are happy with your service the way it is – your revenue and the time spent on it could improve dramatically! Now isn’t it time you pampered them for being such wonderful customers?!

Spend more time taking care of those customers who already love your products and services – and anchor the sustainability of your business!

Because you might be chasing (to no avail?) the customer who spent €1000 in your shop back in January, hoping for another such windfall – and in the meantime you might be neglecting the customer who comes every two or three weeks and routinely spends €100. Now isn’t it about time you returned some customer love?

 

KPI 2. Margin

 

The second KPI is, of course, the margin of your products: the revenue, minus costs. This KPI allows you to know exactly which customers, products or business lines are profitable.

You may be thinking “What am I reading this article for?! To be told that I need to know how much money I am actually making, as opposed to just taking in? Thank you, but I didn’t need YOU to find THAT out!

And still I have come across few small businesses that can answer this question: “Do you know your margin per customer?” For the same reasons as above, knowing your rough margin is not enough. The numbers have to be broken down per customer, per product or per line of business.

Remember, revenue is vanity, profit is sanity… You might be thinking a certain line of business is great because it is making you a lot of money – until you realise all the expenses associated with it are actually bigger than the revenue it brings!

Knowing your margin on each line of business will allow you to locate business that is making a loss, and to get rid of it! Indeed, if you grow something that is making a loss, you will only grow your loss!

On the other hand, you can identify the high margin or scalable activities and put more effort into generating more of this type of business which, again, would help you make a significant difference to your bottom line.

 

 

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Susan
By Susan October 3, 2012 11:54