What is a KPI? It stands for:
Any KPI you choose should directly impact the result you’re trying to achieve.
So, let’s dig into how you should pick a KPI.
Identify a goal you want to reach
Every business should have goals. Some businesses do this more formally, others are held in the owner’s head.
Think about each goal you have and pick a goal to start with.
We’ll come back to the others later, but for now we’ll focus on just one.
List all the KPIs related to that goal
Now that you’ve narrowed to one goal, take out some sticky notes and start writing down your KPIs on the sticky notes (only 1 per sheet).
Some of these will be financial, others will not. It’s important that you have both.
If you run out of ideas, search on google to find more. You can’t have too many at this stage.
Now, group them based on their similarities.
Evaluate the importance and ease of collection (rate them)
Now, one-by-one ask:
- How important is this metric? Rate it between 1 (not important) and 10 (extremely important)
- How easy is it to collect it? Rate between 1 (hard) and 10 (easy)
How important is this metric?
This will be determined by your gut feel, but some good questions to ask:
- What impact will it have your final goal?
- Can you choose a metric closer to the initial action being taken?
- If this increased by 10%, what would happen?
- If this decreased by 10%, what would happen?
When asking these questions, make sure you answer honestly.
Inputs that you can directly tie to your goal are some of the best metrics you can have. By asking “what’s before that” over and over, you can get to the root metric in the chain. This is typically an input, or action, that one individual will take.
If the impact of a 10% swing is likely more than 10% to revenue, then you have a really important number.
After thinking through these, come up with a score between 1 (low impact) and 10 (high impact) and write it on the bottom left corner of the sticky note.
How easy is it to collect?
The goal is to pick KPIs that you’ll actually track. If it’s complicated or cumbersome to track, you’ll get frustrated with tracking it and stop.
So, to assure you can keep at it, ease of tracking is important.
You want to think:
- How long does it take to gather?
- How annoying is it to gather it?
- How motivating (or not) is the number?
When you see sales calls go from 40 to 50, that’s exciting. But when you see minutes logged go from 500 to 550… who cares. It needs to mean something to you.
Taking all that into account, give it a score between 1 (hard) and 10 (easy) and write that score on the bottom right corner of the sticky note.
Cull the list
Add together the two scores from the last step and write the total at the top middle of the sticky note.
Now that you’ve identified your most important metrics by score, leave the top 10 out and put the remainder away.
Identify 1 leading and 1 lagging measure per goal
This is where the work gets hard.
Going back to the definition of KPI, we want to make sure we’re able to track each selected metric against our goal.
Ask: which metric is most likely to tie to the goal and cover blind spots of the other?
Take your time and don’t hesitate to stop and come back later.
These are important and you want to give yourself time to process it.
Once you’ve identified 1 leading and 1 lagging for your goal, move to the next step.
It can be okay, in some situations, to only narrow it to 3-4, but do your best to not go more than 4.
Document your process
Now that you’ve identified what metrics you’re going to use, it’s time to document the process of tracking the metrics.
Answer the following:
- Where you’ll get it. If you don’t know where to get it, you’ll slow down and no one else can duplicate it.
- How frequently you’ll report it? If you don’t choose a frequency, it’ll be “whenever” which is the same as “never.” Frequency also creates consistent numbers to look at.
- Who is responsible? If you don’t have someone responsible, it won’t happen.
- Who needs to know? If they collect it but don’t report it, what was the point of collecting it?
Monitor, report, and refine.
You won’t be perfect at selecting the right metrics. This is vital to make sure you end up with reports that are actually useful.
If you miss any of these steps, the process breaks down.
If you want to better understand financial statements, here are 3 ways I can help: