The simple measuring tool that will allow your business to flourish (KPIs 2)
Revenue and margin are two crucial KPIs. Most businesses do use those KPIs, but they should take it a step further and make sure they know their revenue and margin per customer.
KPI 3. Cashflow and sales cycle
Cashflow is the way your revenue and expenses are spread over time. You know the way it works: you have that huge bill to pay in three weeks’ time, and you hope, hope, HOPE the invoice you sent two months ago will be paid into your account before that.
So you call your debtor to speed things up and remind them they have to pay you, and you call your creditor to ask for one more week before you pay that bill. You have in effect attempted to regulate your cashflow.
Now ideally you shouldn’t be in this situation (ideally…). This is why it helps to keep a sharp eye on your cashflow (and anything you want to keep a sharp eye on is, in fact, a KPI) and to know exactly how long your sales cycle is.
Your sales cycle, quite simply, is the amount of time that elapses between the moment you start to market your services to a customer, and the moment they pay you. As you can see it encompasses the whole process of being in business! Identifying leads, turning them into customers, taking orders, delivering your service or product, invoicing, and finally getting paid.
Now if you know how long, on average, that sales cycle is, you are in a much better position to take the pulse of your business – to measure the ebb and flow of your cashflow.
And you can also work to reduce the length of that sales cycle. You can now look at that sales cycle in more detail and identify places where it could be sped up: bottlenecks, delays, etc. Once again, monitoring KPIs allows you to identify patterns and look for their causes. The tighter your sales cycles, the quicker your cashflow can come through.
I have a tip for you: many sole traders should keep in mind that monitoring cashflow would allow them to fight a strange phenomenon familiar to many entrepreneurs: the end-of-autumn depression. The one around October 31.
If you know you will have to face a big expense around that date (and we all hope we will, as the more you have to pay in tax, the more profit you have generated), you can engineer your cashflow so that you have immunised yourself against panic around the time of the tax deadline.
What to do with KPIs
I would recommend you spend as much time as necessary to get it right in the beginning: take half a day or even a whole day to set up a spreadsheet that will be easy to fill in and takes in all the KPIs that reflect the health of your business. If you’re not sure how to do that, look up some YouTube videos and learn how to automate a spreadsheet to speed up the process no end.
Then use that spreadsheet! Don’t let it gather dust like another list of New Year’s resolutions. Make sure to schedule a time in your diary, when you open that file and fill in relevant details.
Next, make an appointment with yourself and write it down in your diary, to spend one afternoon each month to look at your KPIs, as this gives you a tight rein on how well your business is doing – and a lot of things can happen in 30 days.
The main benefit of KPIs is that they annihilate procrastination: they give you laser focus on what’s important. Similarly, KPIs are a great tool for start-ups: it allows them to focus on where their growth actually comes from, thereby immensely improving their chances of survival. A lot of start ups can be “busy fools”, working all hours, chasing customers on twitter and facebook, but not actually selling. Your revenue per customer will show that in no uncertain terms and will leave you nowhere to hide…
But be careful, as they say, you don’t fatten a pig by weighing him: don’t spend all your time building KPIs and analysing them, make sure you do something with the information and take action! Can you increase your revenue? Have you identified patterns in your revenue that you can exploit to your advantage? Can you increase margin? Can you shorten your sales cycle? How? These are all actions you can take, based on your monitoring of KPIs – so get to work!
I strongly advise you set goals in relation to your KPIs, because they are focused on results. The number of phone calls you made, of emails you sent, is a quantifiable variable, and one that can be helpful to frame your efforts, but it might not be directly related to how well your business is doing, the way a KPI is. A goal such as “improve my margin by 40%” or “grow this product line by 100% in 3 years”, once you have broken it down into actionable steps, will do more for your bottom line than just sending another flurry of emails.
I can’t say it enought times, take real action with the information in the spreadsheet – and you will be surprised at what happens!
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