How well is your business doing? Measuring your business’ performance and success means looking not only looking at how it stands financially, but also taking a close look at how it is doing in a number of other areas, such as customer satisfaction and retention and employee turnover. Knowing where your company stands today allows you to plan for its future, whether you hope to expand the business or increase profits.
Set Goals and Priorities
Before you can measure anything, you want to have an idea of why you are keeping track. Otherwise, you are collecting data that serves no purpose.
Setting goals and determining what your business’ priorities are will give you an idea of what you need to pay attention to. For example, if you’ve been losing clients or customers, and want to reverse that, you will most likely want to take a close look at customer service at your company. If your goal is to increase revenues by a certain percentage, you’ll want to examine the financial state of your business, including what money is coming in and where it is coming from. If having to constantly hire new staff is costing your company a lot of money, your goal might be to reduce turnover by a certain percent.
Use Key Performance Indicators
Once you know what you are aiming for, the next step is to determine the best way to measure. Key performance indicators (KPI) are simply measures that your company can use to see if it is on track when it comes to reaching its goals. The KPIs that are relevant to your company will vary based on what you intend to measure and what your company’s goals are.
Financial KPIs
For example, if your goals focus on the financial side of your company, the KPIs that matter to you might be the net profit margin, the return on assets, or the return on equity. The net profit margin lets you see how much profit your company brings in compared to its revenue. It’s your net profit divided by revenue.
Your goal might be to increase your company’s net profit margin to a certain percent within five years. Knowing what the margin is for the past few years will give you a sense of whether your company is on track or not, and can give you an idea what needs to be adjusted. You might need to increase revenue, for example, or find a way to decrease your costs or expenses so that your profit goes up, even if your revenue does not.
Customer KPIs
Performance isn’t based on finances alone, but if certain other areas of your company are floundering, you might start to see an impact on the financial side. For that reason, you might set goals to increase customers or to increase customer retention. Your company’s goal might be double your customer retention rate or to double the number of new customers. In that case, the customer retention rate is a useful KPI to track. To figure it out, you make note of the number of customers you had at the start and end of a period, such as a month or quarter, plus the number of new customers gained during that time.
Subtract the number of new customers from the total number left at the end of the period, then divide the difference by the number you had at the beginning. If you ended the quarter with 500 customers, started with 550, and gained 50, your retention rate is about 82 percent, meaning you lost 100 customers. If your goal is to increase that percentage to 100, you’ll either want to focus on keeping the customers you have or on finding ways to replace the ones who leave.
To know where your business is going, it helps to know where it currently stands and where it has been. At New Direction Capital, our goal is to work with you and help you determine which performance measures will help your company get to the next level and continue to grow.