What are KPIs and why do I need them?
Key Performance Indicators (KPIs) are the scoreboard for your business. They’ll tell you where you are winning and where you need to improve. Imagine going to a basketball game where there was no scoreboard. Just two teams playing basketball. You’d be outraged and demand the score be displayed. Yet, like many other business owners, you run your business, your livelihood, your retirement strategy, without a scoreboard.
Why are KPIs Used
As a Business Owner, you sometimes feel overwhelmed and distracted with all of the daily activities and tasks. Yet you must make important decisions, quickly, with great consequences, and often with limited information on hand. Without the right KPIs to guide you, you tend to focus too much on the tactical daily issues and neglect the strategic decisions that have critical impact on your success. You can’t manage or grow what you don’t measure.
What KPIs Should be Used For
KPIs will communicate and inform – your team, suppliers, and customers, about the business situation. They act as a diagnostic to tell you the health of your business in many different areas. They are a source of learning – which marketing, which programs are working or not working. And they guide your decisions and help you define what action to take next.
What they should NOT be used for is controlling. It’s tempting to try to control employees and others using KPIs. I’m not saying don’t use them with employees, but use the right ones, and use them for continual learning and improvement, not to control how many times a day they use the restroom.
How To Implement KPI’s
Step 1: Define your strategy
- Strategy reflects the company Vision, Mission and Values – do you have yours well-defined?
- Set goals
- What are your most important business objectives?
- What “drivers” are critical to success?
- What impacts driver results?
- Which can align team members on strategic issues?
- Which can identify barriers to growth?
Step 2: Audit Existing Measures
- Assess strategic fit of your existing KPIs
- Identify what data is available
- Review measurement processes
- Review Accuracy
- Review Timeliness
- Identify gaps
Step 3: Develop New Measures
- Bridge the gaps identified in Step 2
- Measures must reflect performance and progress of business
- They are quantifiable
- They are actionable
- They are comparable with another number
- Last year
What are the trends? Look at your KPIs over time to see more deeply what they’re trying to tell you. A measurement by itself with no comparison is not as revealing.
Step 4: Analyze and Report
- Make it easy to read
- Create a one page summary
- Include visuals & graphs
Step 5: Continuous Improvements
- Set priorities based on strategy
- Ensure your goals are SMART
- Assign accountability!
- Track improvement
- Set new goals!
Start today by listing the key drivers in your business. If you’re not sure, start measuring the 5 Ways numbers: 1) Lead generation – where are your leads coming from; 2) Conversion – how many do you turn into customers; 3) Average dollar sale of each transaction; 4) Number of transactions – how many times does a customer buy; and 5) profit margin, gross and net. Sign up for a workshop to learn more.
This article provides an overview of the five steps of setting KPIs. Look for more details on each step coming up in the next posts.
The Hardest Sale You Will Ever Make – Your Business
They say the three most stressful times in a person’s life are when they get married, buy a house and change jobs. Well, I don’t think whoever said that considered starting and selling a business – your company is your baby, the thing you have built over 15 plus years. You have put your heart, soul and an incalculable number of hours into it. Now you want to sell it.
There are many things you need to do and consider, but these seven areas are of immense importance when it comes to finding a buyer, selling the company and getting the most value for it.
1. Think about who would want to buy your business:
Do you have employees that have the management ability and the mindset of an owner and the ability to access capital to pay for the business? If these people aren’t working for you now, do you have time to recruit them and teach them the business with an understanding that they might take over? What about your suppliers, customers or competitors? They might be looking for an opportunity to enter your part of the industry.
Finally, you can go to the general market. Contact a broker that has experience in your type of business or get in touch with me for a referral to one.
2. Remove Yourself from the Business:
Many businesses revolve around the owner. Customers are used to dealing with you. Suppliers have long relationships with you. Your team trusts you. All these relationships need to be transferred to your other staff or the new owner.
3. Setup the Business as if you are going to Franchise it.
If the business exists primarily in your head, it’s not a company you can sell. No one will buy a business that relies solely upon the current owner – the person who wants to sell it and walk away.
Off load your knowledge and expertise into systems you can sell with the company. A well-systematized organization is attractive to prospective buyers who see the potential to own a business that runs smoothly using systems and, importantly, can run without their personal input.
A business that runs under management attracts a premium price when it comes time to sell.
4. Lock in your Key Staff – The most Important People in the Business:
If your senior staff aren’t in a position to buy the company, you need to lock them in some way. Best thing to do is talk to them and keep them fully informed.
Keep them up-to-date with developments in the sales process and make sure they understand where they will fit in after a successful sale. Consider introducing bonuses contingent on a successful sale.
5. The Customer Database – Your Pot of Gold:
This is what will add value to your sale price. Think about it from the buyer’s perspective, they are buying a company that with the hope that the customers continue to deal with them.
By developing solid relationships and a detailed database of your customers you will be giving them more confidence that they can manage the client relationships after you have gone. And they’ll value the business much higher.
6. Formalize Everything – Agreements:
Get all loose agreement in writing. Start with your employment agreements. Develop up-to-date agreements that lay out the terms and conditions that you employ your staff under.
Put agreements in place with your suppliers and customers as well. These should include trading terms, pricing contracts and any other “verbal” arrangements.
7. Ensure you have the Best Looking Financials:
You should aim to show three years of constant growth, with healthy-looking financials. Clean up any personal items that could be questionable as business expenses – this will improve your profit figures.
Clear up all outstanding debtors – this will improve your cash flow figures. Reduce any excessive spending and make the company look as profitable and attractive as possible.
8. Get a Business Coach to give you an Outsider’s Perspective:
Clients often come to me looking for someone outside the organization to assist them with the eight steps above. They are GREAT business owners, but may never have been through the sales process before.
An experienced business coach will not only provide you with advice to keep you on the right track, but also the motivation and confidence to see the project through.
Many people wake up one day, fed up with their company and then hurriedly attempt to sell it. This doesn’t work. Plan it two to five years in advance so that you get the best outcome.
Follow the eight steps above and you will reap the rewards for the many years you spent building your business.
To learn more, come to my free workshop this Friday on “How To Build A Business You Can Sell”.
Most business owners hope that they have Financial Mastery of their business, but let’s not just “hope”, let’s make certain that you do!
In the ActionCOACH system, the first stage in the foundation level is FINANCIAL MASTERY. Financial mastery is one of the skills, capabilities and tool sets you must have in your business to be successful and ensure that you the fundamental financial insights into your business to help you make great decisions.
Financial Mastery begins with reviewing your business financial reports on a regular and timely basis. You should be reviewing three critical financial reports on at least a monthly basis – your Profit & Loss Statement (P&L), your Balance Sheet and your Cash Flow Statement. These three financial documents will tell the story about your business. Together they paint a powerful picture of how well your business is performing, where your opportunities for improvement are hiding and what the near term future outlook is from a financial perspective. It is critical that you are having these prepared on a timely basis and are reviewing them monthly. In some businesses with high frequency and volume of transactions, it should be weekly. How often do you review your statements?
Once you have your monthly financial reports available, you are in a position to track some Key Performance Indicators. These are important ratios and measures that you can lift from your financial statements and track on a regular basis. You not only want to know where your business is at a particular snapshot in time, but you want to know how your business is doing relative to the past months – perhaps even to the same month the prior years. Have you identified your Key Performance Indicators?
These Key Performance Indicators are best viewed on a Dashboard – a visible set of graphs that tell a story of the health and trends in your business. Your dashboard should be updated at least monthly and should be much like the dashboard of a car – allowing you to look forward rather than in the rear-view mirror. Included in your dashboard should be activities that are not found in your financial statements, but rather reflect your lead generation and lead conversion success rates as well as other delivery and customer satisfaction measures. Is your Dashboard up and visible? Are you aware of the trends in your business? What are the key drivers of your business?
Being successful in Financial Mastery is a partly about your mindset. You must have the disciplined mindset to consistently review the financial data you need to run your business, and the stomach to look even when the news is not good. How can you know who is winning if you do not know the score? As you gain familiarity and the process becomes fast and easy, you can expand your awareness. You can begin looking at the individual profit margins by product or service type, see which of your marketing efforts are paying off most profitably, or you can anticipate cash flow crunches on the horizon – and many more critical metrics.
Nothing should be a surprise in your business. Would you fly an airplane into weather without a solid instrument dashboard and the expertise on how to use it properly? Would you do that if your mindset was not 100%? Of course not! Yet I talk to business owners every single day whose lives ultimately depend on how well their business runs, yet they don’t have the dashboard, systems or KPIs in place to ensure that they and the business are running at peak performance.
The faster you want to go in your business, the better set of financial indicators you must have. Going fast is good only if you have the financial awareness and can read the financial dashboard During this stage of the race, take the time to nail down your Financial Mastery. Expect and demand the regular reports, graphs, metrics and indicators that will let you race even faster – without the fear of not knowing where you are headed or whether you have enough gas!
Get a free business health check to find out where you stand.
How to Keep Your Customers Coming Back
So we’re on step 4 this week of reviewing the 5 Steps to Increased Profits framework – focusing on one of the five steps each week. As a review, the five key profit-generating metrics are: Lead Generation, Conversion Rate, Average Dollar Sale, Number of Transactions, and Profit Margins.
I’ve highlighted the five keys in the following equation:
Avg. Dollar Sale
Avg. # Transactions
I talked last post about the importance of ensuring you boost your Average Dollar value of each sale. This week we focus on increasing Number of Transactions by looking at how to keep customers coming back. Many businesses think that once they have a new customer, the work is over, but in fact the work has only just begun!
When a prospect buys from you for the first time, they step on to the first rung of what we call the “ladder of loyalty” and become a shopper. Then when they buy again they take the next step and become a customer, and so on up the ladder, as can be seen in the following diagram. The framework to keep customers coming back and generating Repeat Business, is to increase lifetime value by using the 7 rungs of the Ladder of Loyalty:
On the lower levels of the ladder, there is very little customer loyalty and if a competitor comes along with a better price, customers are more than likely to give them a try, and you may never see that customer again. The art of achieving a high level of customer loyalty is to move them further up the ladder, so that they become loyal clients and eventually raving fans. Once they become a raving fan, not only can you guarantee they will always buy from you, but they will go a stage further and start actively recommending other people to come to you, so helping to fill your sales pipeline.
So how do you turn your customers into raving fans? Well, the first stage is to know who your customers are and categorize them based on how much they spend with you and how much of your time they take up. I use an ABCD system:
A = Awesome
B = Basically sound
C = Could do better
D = Don’t want to deal with
There is little point in spending time and effort with your D clients. These are the ones that haggle over price, take up your time over pointless queries and spend so little with you compared to the effort you put in that if you checked, you’d probably find that they bring you no profit at all. So just pass them on to one of your competitors; you never know, they might become their awesome clients!
C clients are those that have not yet been educated in how you like to do businesses. They have some of D’s habits, but buy sufficiently from you that they are worth trying to upgrade.
B’s are the clients who form the bread and butter of your business. Some you will be able to upgrade but others will need more attention and appreciation to maintain their loyalty
A’s are your advocates and raving fans. These guys make what you do enjoyable. They not only buy from you but they can’t wait to tell others about you.
So what do you do to upgrade and maintain your clients at the appropriate level? Well, the answer is simple. You keep in contact with them and create a loyalty program. There are many ways that you can keep in contact with your customers, and technology has made this far easier than ever before. Through email, blogging and social media, you can remain in contact with your customers as regularly as you like for the minimum of investment.
The more traditional method of keeping in touch with your customers include telephone calls, newsletters, direct mail and entertaining. Whichever method you use, you must bear in mind the appropriateness of the medium and its effectiveness and importantly, make sure that you give value to the customer.
The easiest method to set up and systemized is the quarterly newsletter or email. Some people dislike newsletters because they are full of dull boring information about the company, which is of no benefit to them. So the best way to appeal to people is to be more creative and have some fun with it and provide high value content. People like to be informed of interesting things, learn something new and have fun. With some thought and creativity, you can make receiving your newsletter a highlight of your customers’ quarter.
Loyalty schemes there are some very simple schemes you can use that will have just as much effect as the big airlines programs. All you have to do is monitor the level of business a client does and then reward them when they hit certain targets. You can do this via databases, accounts systems or plain and simple printed cards. Rewards need not be money off; in fact you can get really creative with this – all you have to do is give perceived value.
One great strategy is to find a non competing business in the same sector and offer each other’s clients something from your range, e.g. a photographer and a florist could swap a bouquet for a portrait. Remember that this will have the added advantage of putting a new person onto each other’s loyalty ladder.
Another great way to reward loyalty is to invite clients to a special event, such as an educational seminar, a new season products launch or even arrange a celebrity visit.
Whatever you do to keep your clients coming back and stepping up the ladder, make it interesting, add value to your clients’ lives, have some FUN, but above all, TAKE ACTION.
I just finished reading The Checklist Manifesto by Atul Gawande which is an intriguing book that makes the case that one can improve any discipline with the use of checklists. Gawande is a surgeon, so most of his examples are in the medical field and he has the statistical research to back up his claim that a simple checklist can save lives. (This book will make you think about some things before going into a hospital!). As a pilot I’m sold on the value of checklists for aviation, but he also draws from the fields of finance and construction to make his point that complex changing disciplines can benefit from checklists. It certainly made me think about how the businesses I know could benefit from checklists – including my own!
Now what he calls checklists, I would also call systems. They are a written series of steps taken to complete part of a job. And the point is to follow these steps every time you do that job. Examples in small business could be a sales process, sales script, marketing campaign, how you take orders, how you answer the phone, how you hire and train employees, etc. We know that systematizing things will lead to greater efficiency, happiness and profit. Yet there is always resistance to doing this; people just don’t like the sound of it.
Gawande explores this human resistance to checklists. He points out that we just don’t like them. They are not fun; they’re painstaking. And they are embarrassing. It somehow feels beneath us to use a checklist and it runs counter to our deeply held beliefs about how truly great people work on their own. People fear rigidity and working as mindless automatons. But it is actually the opposite! Systematizing certain routine processes frees up your brain to think about other higher level activities, allowing more creative problem solving to occur.
Every business I know can benefit from systematizing certain procedures, but it is not a smooth process to change over to. It means embracing a culture of teamwork and discipline. And discipline is hard! Having a system in place can help make priorities clearer and can prompt people to function better as a team. But you have to train your people in how to use them.
Here are some points from the book about writing a checklist. Use simple, exact wording and keep the list short by focusing on the most overlooked and most detrimental steps to skip. Make sure the list is precise, efficient, to the point and easy to use. And make sure it’s practical! Keep it free of clutter and unnecessary colors. And make sure there are communication check points on the list so teams talk to each other. First drafts will almost always need revisions and rewriting. Test it, change it, and test it again.
Creating good systems takes time up front, but will lead to increased efficiency with fewer mistakes and this will lead to increased profitability in the long run. If you need more convincing about the impact a system can have, I strongly recommend reading this book, The Checklist Manifesto!