Why KPIs Are Important
As a startup owner or leader, I am sure you have heard someone say, “you better know your ‘KPIs’”. Well, this is very true. Your KPIs, or ‘Key Performance Indicators’, serve many important purposes. KPIs help you monitor and manage your business. KPIs are the backbone to your financial story for investors. KPIs provide focus to your team to make sure you are all rowing in the right direction.
KPIs sound great. Developed and monitored effectively, KPIs can be the secret sauce for successful businesses. The problem is that they only are effective if you choose the right ones. So, how do you choose your KPIs? And once you choose your KPIs, what’s next? Let’s break this problem down into bite-size pieces:
What qualifies as a KPI?
A KPI is any metric that can be quantified and measured over time. KPIs are not limited to metrics that appear on your financial statements. For instance, two common KPIs for SaaS businesses are “number of monthly unique visitors” and “churn rate” (% customers lost during a given period). These two metrics, which do not appear on any financial statement, are vital to delivering the revenue goals for many SaaS businesses.
How do we choose the right KPIs for our startup?
The best place to start is your financial forecast…and then work backwards. In order to tell your financial story as a startup owner, you need to develop a financial forecast. Start there and list the assumptions you made to deliver that forecast. Some examples:
In order to achieve your projected sales, what assumptions are you making for monthly unique visitors, monthly licenses or subscriptions, or foot traffic?
In order to come in at or below your cost of goods sold forecast, how many units do you need to process per day?
What are your headcount and average salary assumptions in your labor expense forecast?
How many KPIs should we have?
When KPIs are effective, they provide focus. To provide focus, limiting the number of KPIs you monitor is important. Once you have worked backwards to identify your potential KPIs, rank them by importance. After you get past your top three KPIs in importance, ask yourself how much more benefit you will gain by tracking the next KPI on the list. At some point, you will see that the additional benefit decreases. A reasonable expectation is to have between 5 and 10 KPIs. For added focus, some businesses will even refer to their top KPI, usually directly related to revenue, as their Primary KPI. When it comes to KPIs, it is always better to challenge yourself to keep the list as small as possible to provide the proper amount of focus on the most important aspects of your business.
We chose our KPIs…Now what?
This is where your tenacity as a leader comes in play. You have done the hard work by identifying these KPIs. Now hold you and your team accountable. Set up a dashboard to be reviewed weekly or even daily based on the frequency and availability of data. Identify owners for each KPI who can help you build strategies to take advantage of opportunities and mitigate risks. Hindsight results monthly to identify recommendations and adjust your strategies accordingly.
By identifying effective KPIs and managing them on a regular basis, you will start to see which actions make a difference and which actions are not adding as much value as you anticipated. You will then put more effort behind what works, and less effort behind what does not.
One final point. If you are not seeing a correlation between KPI trends and business success, do not be afraid to re-evaluate your KPIs! KPIs create the lens through which you view your business. If the lens is not projecting an accurate picture, you need to adjust the lens by changing your KPIs. If you need to change your KPIs, it means you learned something new about what drives success in your business!
Good luck on your startup journey! If you need support in establishing KPIs, developing your financial forecast, or simply telling your financial story, we are here to help!