You know the business is busy, but you are not always sure it is heading in the right direction. The year-end accounts arrive months after the fact, the bank balance tells you very little about why things happened, and most of your judgement calls come down to gut feel. Knowing how to set KPIs for a small business changes that, without drowning you in spreadsheets.
A Key Performance Indicator (KPI) is simply a specific measure of how your organisation is performing in an area that matters to its long-term success. Good KPIs are consistently measurable, spread across the whole business and let you watch trends rather than one month in isolation.
What gets measured, gets managed.
Peter Ferdinand Drucker
1. How to set KPIs for a small business: start with your destination
KPIs exist to measure progress towards a goal, so you need a goal first. As Stephen R. Covey put it, successful businesses “begin with the end in mind.” That means a clear Compelling Vision, SMART goals and a strategy setting out how you will get there.
In practice there are three main reasons to measure performance regularly:
- to learn and improve;
- to report externally and demonstrate compliance; and/or
- to control and monitor people.
Data moves the conversation from “I think the problem is…” to “The data indicates the problem is…”. Every KPI should link clearly back to your strategy and the things that matter most.
2. Identify the core processes that drive your vision
Next, work out which of your core processes are crucial to achieving your vision. These are your Critical Success Factors (CSFs). A CSF is a practical system or process the business must have in place, while a KPI is a measure that quantifies an objective so you can monitor performance.
For a business taking a high volume of phone orders, the CSF might be installing a call centre for taking orders. The KPI would be the number of calls answered within three rings.
Make a full list of your CSFs using the Balanced Business Scorecard, which has four quadrants: People, Process, Financial and Partnerships (customers and suppliers). Aim for at least three or four under each. Examples include establishing clear budgets (Financial), regular reviews (People), a quality system (Processes) and regular customer feedback (Partnerships).
3. Turn your Critical Success Factors into KPIs
KPIs break overall performance into bite-sized chunks, and they should only track what genuinely moves you towards your vision. The acid test: “If this KPI is not achieved, will the business fail to achieve its goal?” If the answer is no, question whether you need it.
Think about each word in the name:
- Key – it is fundamental to competitive advantage and make or break for the business or process.
- Performance – it is clearly measurable and something you can influence. A tourist business cannot influence the weather, and nobody can use the Bank of England base rate as a KPI.
- Indicator – it gives leading information on future performance.
A high-volume, low-cost manufacturer might focus on production line speed, while one making smaller runs with expensive components might focus on reducing errors. A sales target of £750,000 is a KPI, but not a great one. Link it to the sales process instead: number of new customers, quotes converted to sales and referrals received. Some drivers are measured indirectly, such as tracking morale through voluntary overtime, absenteeism and sick days. Once set, avoid changing key numbers too often, or you lose the trends.
4. Choose quality over quantity
You can measure almost anything, which tempts some owners to measure everything and slide into micro-management. Resist it. The best leaders review the numbers regularly but quickly, then get out from behind the desk to coach their people towards the targets.
For every measure, ask: “Does it have the potential to make a significant positive impact on the business?” and “Can we influence this number?” If either answer is no, drop it.
5. Set specific, time-based targets
Now attach specific, measurable, time-based targets. Your size and sector will shape whether you set them for the whole business or by department. Either way, KPIs should empower employees and help them learn. They should never be used as a stick to beat people with.
Use your sector's benchmark numbers where you can. Typical examples include B&Bs targeting occupancy of around 70%, solicitors aiming for turnover of three times salary, hotels keeping wage costs to no more than 40% of turnover, and restaurants setting gross margin at 80% for food and 65% for wet sales. The target you cascade will also depend on the market, competitors and your own personal bests.
6. Record the data consistently
Successful KPI tracking rests on capturing data the same way every time. If each line manager records sick days in their own format and location, the results are almost impossible to collate and close to meaningless.
Ask why you want the data, where it will be collected, who will collect it and how much you need, and how often. Those closest to the data should collect it, with the training and time to do it properly. Choose between event-driven measurement (recording each late delivery or complaint as it happens), sampling (checking, say, six complaint files a month) or simulation (role play to test sales conversion or complaint handling).
Start with a manual system and automate once it has bedded in. If gathering the information would take days, either it is not a core process or your processes need simplifying. And do not rely on year-end accounts: that information can be nearly 18 months old.
7. Report the numbers so trends jump out
Present results so the management team can interpret them quickly. Words, numbers, star ratings and RAG (Red Amber Green) status are all valid. Graphs and charts make trends instantly clear.
- Use a one-page summary, backed by detail, listing headline KPIs such as total sales and gross margin plus your top five drivers.
- Show actual figures alongside the target and prior month.
- Add a short written commentary explaining important changes, such as a virus driving up absence in one department.
8. Get your team's buy-in
If KPIs are new to your business, expect the usual allergic reaction to change. Involve people early, share the vision and strategy, and show how their actions affect the numbers. The more input you allow at key decision points, the more acceptance you will get.
- Announce it as an idea, put it on the agenda as a DRAFT and ask for input.
- Act on at least a few of their suggestions.
- Keep KPIs on the agenda and listen to the front line.
- Gain an ally who has influence with colleagues.
- Celebrate personal bests, and brainstorm causes when trends turn negative.
9. Use your KPIs to drive performance
Too many businesses use KPIs as top-down command and control. Remember that leadership is influence, not control: you can control almost no one, but you can influence almost everyone. If you link KPIs to reward and recognition, watch for people hitting the target but missing the point. Explaining the ‘why’ and ‘how’ early helps avoid this.
Review KPIs monthly on simple line graphs so you can see normal variation and seasonality, and do not react to short-term blips until you understand the cause. Then agree key actions, each with a time frame and one named owner. The Stop, Start, Continue model works well: three things to stop, three to start and three to continue, reviewed next month or quarter.
10. Benchmark yourself against the best
Once you have trends, look outwards. Benchmarking means comparing your processes and metrics with the best in class. Compare processes as well as results, and you will pick up the best practices that show you what great looks like.
Where to start
This week, take one sheet of paper per quadrant of the Balanced Business Scorecard and list three or four Critical Success Factors under each. Then, for each one, write a single measure and put it through the acid test.
Keep only those you can influence and that would genuinely hurt if missed, decide who will record each one, and set a date for your first monthly review.