How SMBs Can Set Meaningful KPIs for Their Business

Evaluating KPIs for Effective Financial Reporting and Analysis

It’s that time of year again when many organizations are busy setting business objectives and planning budgets for the next fiscal year. Part of that effort requires a deep dive into the overall financial health of your organization. This includes analyzing key financial metrics as part of the financial reporting and analysis process to see where you are today, determine where you want to be tomorrow, and figure out how to get there. For SMBs, evaluating KPIs (Key Performance Indicators) and performing KPI analytics are where meaningful details can emerge.

Importance of KPIs

KPIs enable you to track the most important metrics for your organization. They offer a critical benchmark for comparison, enabling stakeholders to see progress or areas of weakness within a given timeframe. For SMBs in particular, KPIs require you to set clearly defined goals based on your unique industry and business model. Common KPIs include gross profit margin, revenue projections, and cash flow, but for SMBs to succeed and grow, it’s valuable to consider non-financial KPIs as well.

Non-Financial KPIs

These intangibles are often hard to quantify but are critical to the viability of your business. They may include metrics such as customer retention, customer experience, employee happiness, brand reputation, and overall business culture. These non-financial KPIs play a significant role in an organization’s long-term success. For instance, a poor customer experience score will decrease customer retention, leading to an increase in the customer churn rate and a decrease in sales, which negatively impacts the bottom line. By taking in the big picture and identifying all the KPIs and metrics that truly matter to the business as part of your financial reporting and analysis, you will be more likely to stay focused on set objectives.

Determining Relevant KPIs

But how do you determine which KPIs your organization should be using? How do you strategically analyze them to achieve your objectives and positively impact your company’s bottom line? The key for SMBs is to narrow the focus and select only the business goals that are both measurable and actionable. KPIs are about tracking progress towards a clearly defined objective within a specific timeframe. Don’t overshoot.

Common KPIs for SMBs

Some of the most common KPIs used for SMBs include:

• Operating cash flow.
• Gross profit margin.
• Revenue growth rate.
• Market share.
• Customer churn rate.
• Break-even markers.
• Accounts payable and receivable timelines.
• Expense ratio.
• Budget versus actual.
• Customer acquisition cost.

Performing KPI Analytics

Once you have established which KPIs are most relevant for your specific business, the next step is to perform KPI analytics. This process enables you to determine how the business as a whole is doing. By evaluating both the outcome KPIs as well as forward-looking KPIs that serve as leading indicators, you can more effectively measure the metrics that have a strategic impact on the business.

Outcome KPIs and Leading Indicators

Outcome KPIs measure past activity, analyzing both the organization’s effort and external factors often beyond anyone’s control (such as the emergence of a global pandemic). For instance, measuring financial performance by net profit or a project’s return on investment (ROI) can help SMBs see how that activity directly impacted the business. Analyzing the results of a marketing effort by evaluating the cost per lead is another valuable metric. Understanding where you are succeeding and where things are currently falling flat is vital for running a successful small business.

Forward-looking KPIs, or leading indicators, are drivers that measure which activity will significantly impact the outcomes. These are action-oriented and force SMBs to focus their time to ensure they are managing the business in ways that optimize the organization’s ability to achieve desired outcomes.

Keeping Your KPIs in Check

It’s incredibly easy to go overboard with tracking metrics, so selectivity is needed. Is tracking a specific KPI important to measure efficiency or safety or to increase awareness? Or is it merely interesting? This is a judgment call, but one SMBs need to get comfortable making as they set their objectives for the year ahead.

Leveraging KPIs for Growth

By leveraging the power of KPIs and KPI analytics as part of the financial reporting and analysis process, SMBs can uncover the best ways to grow and positively impact their organization’s bottom line. The ability to make informed decisions based on accurate and relevant KPIs ensures that SMBs remain agile, focused, and ready to achieve their strategic goals.

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