This article follows on from last week’s blog which dealt with Key Performance Indicators – why they are vital and how to implement them, to in a sense, take the pulse of your organisation and so determine where adjustments must be made, and wins leveraged to ensure lasting results.
Let’s get started by addressing why you are in business, what are you looking to achieve, who your target customers are, and what you see as your core purpose. The answers to these questions can help you identify your pain points, so you understand the numbers required to sustain your business and then adapt your strategy accordingly. After all, clarity breeds confidence.
Key Area 1. Financial
What drives your business?
The first area I want to share with you is the most relatable and yet underutilised by so many. Once your financial KPIs are set up, you’ll be automatically alerted when something goes astray, so that you can take appropriate action.
Profit: It almost goes without saying, but it’s still important to note, as this is one of the most critical performance indicators. Don’t forget to analyse both gross and net profit margins to better understand how successful your organisation is at generating a competitive return.
Cost: Measuring cost-effectiveness helps you find the best ways to reduce and manage your expenses.
Revenue Vs. Target: This is a comparison between actual and projected revenue. Charting and analysing the difference between the two will help you understand how well your department is performing.
Cost of Goods Sold: Tallying your production costs gives you a more comprehensive idea of what your product markup should look like and your actual profit margin. This information is key in determining how to outsell your competition.
Day Sales Outstanding (DSO): Take your accounts receivable and divide them by the number of total credit sales. Take that number and multiply it by the number of days in the time frame you are examining. Congratulations—you’ve just come up with your DSO. The lower the figure, the better your organisation is doing at collecting accounts receivable. Running this formula monthly, quarterly, or annually allows you to see if your DSO is improving.
Expenses Vs. Budget: Compare your actual overhead with your forecasted budget. Understanding where you have deviated from your plan can help you devise a more effective departmental budget in the future.
Key Area 2. Customer
What your customers are looking for?
To develop accurate customer KPIs, it helps to step into yourself in your customer’s shoes, so you can better understand what they’re looking for.
For example, why do customers choose one airline over another?
Or why do customers choose one clothes retailer over another?
Customer Lifetime Value (CLV): Minimizing costs isn’t the only – or even the most effective – way to optimize your customer acquisition. CLV helps you comprehend the value your organization is realising from a long-term customer relationship. Use this performance indicator to narrow down which channels help you acquire the most loyal customers at the most competitive rate.
Customer Acquisition Cost (CAC): Divide your total acquisition costs by the number of new customers in the time frame you’re examining. Voila. You now know your CAC, considered one of the most critical metrics in e-commerce because it can help you evaluate the cost-effectiveness of your marketing campaigns.
Customer Satisfaction & Retention (CSR): On the surface, fulfilling this concept appears simple. Keep the customer happy, and he or she will remain loyal to you. Many firms argue, however, that this relates more to shareholder value than to the customers themselves. You can use multiple KPIs to measure CSR, including customer satisfaction scores and the percentage of customers who make repeat purchases.
Net Promoter Score (NPS): Calculating your NPS is one of the most informative ways to gain insight regarding your long-term company growth. You can determine your NPS score by asking customers to complete quarterly surveys about how likely they are to recommend your organisation to a friend, colleague or family member. Establish a baseline with your first survey and put measures in place that will help boost your score from quarter to quarter.
Number of Customers: As with your profit metric, this KPI is straightforward. By determining how many customers you’ve gained and lost over a given period, you can understand whether you are meeting your customers’ needs.
Key Area 3. Process
What more can you do?
What more can you do or keep track of to ensure you are running a highly profitable, efficient, and competitive business?
Customer Support Tickets: Analysing the number of new tickets the number of resolved tickets, and resolution time will help you develop a proficient and popular customer service department.
Percentage of Product Defects: Take the number of faulty units and divide it by the total number of units produced in the time frame you’re examining, and you will have the percentage of defective products. Clearly, the lower this number, the better.
Efficiency Measure: Efficiency is measured differently in every industry. Let’s use the manufacturing industry as an example. You can measure your organization’s efficiency by analysing how many units are produced hourly, and what percentage of time your plant was up and running.
Stock Write Off: Track how much of your resources you are losing or wasting due to error. If the figure is unacceptably large, review your processes and enact procedures to counter the effect.
Key Area 4. People and Innovation
What can you do differently?
What can you do to rejuvenate and innovate and keep your business competitive?
Employee Turnover Rate (ETR): To determine your ETR, take the number of employees who have departed the company and divide it by the average number of employees. If you have a high ETR, spend time examining your employment packages as well as workplace culture and environment.
Percentage of Response to Open Positions: When you have a large percentage of qualified candidates applying for available positions, you know you’re doing a good job maximizing exposure to the right applicants. This will lead to an increase in interviewees, as well.
Employee Satisfaction: It makes sense that happy employees will be more willing, able, and productive. Regularly measuring employee satisfaction using (anonymous) surveys and other metrics is vital to your departmental and business health.
Life rewards those who act to achieve their goals. Don’t allow your lack of insight to keep you from working smarter and taking your business to the next level. Contact SMART Business Solutions today to discover how we can offer your business the support and accountability required to improve.
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