One of the first serial entrepreneurs that I met was Mark Collare, owner of Pro Pallet South in Troy, North Carolina. The biggest takeaway that I learned from Mark was how to look at any process and figure out where the bottleneck is. Mark is Six Sigma genius and was always looking for ways to make his pallet manufacturing operation run faster and more efficient. That was the first time that I was introduced to Key Performance Indicators or KPIs.
Over the last 2 years I have become obsessed with successful companies and more often than not, the most successful entrepreneurs have between 1 and 3 Key Performance Indicators (KPIs) that they and their entire team follows on a near fanatical level.
Many entrepreneurs that I have known don’t track KPIs in their business and it can sometimes be intimidating to boil your entire operations down to 3 numbers. However, in today’s challenging business environment, knowing your company and being able to nimbly make decisions is oftentimes the difference between a successful business and one that sucks the enjoyment out of their owners.
If you already track KPIs in your business, I would love to hear what they are and how you decided that they were the things that were most critical to you. If you don’t track KPIs, then I hope the 4-step process below will help get you on the path to better understanding your business; which will allow you to better lead your company.
Step 1: Determine what is most important to track. An effective KPI is one that allows you to boil your complex organization down into a single result. Some entrepreneurs start by looking in at their financial reports and track the items that have the biggest impact (i.e. the expense category that most effects their profitability, or has the most volatility). I know of a law firm that specializes in minor traffic offenses (speeding tickets, moving violations). They have built an electronic system to handling all the filings and plea deals. Since they don’t make much off each case, it is imperative that they get as many cases as possible, which means that their marketing pennies had to work like dollars. As you might guess, their KPI was their CAC (Customer Acquisition Cost) and they work tirelessly to get that number as low as possible.
Step 2: Discover how that financial result is impacted by operations. Any entrepreneur will tell you that the numbers on the financials tell a story – they just don’t tell the entire story. In order for a KPI to be meaningful, it has to be tied back to the actual activities of the company. For example, a retail boutique may determine that number of items sold per employee is their KPI. This meant they were tracking the 2 biggest expense items (inventory cost and wages). This company made the decision to invest in an all-inclusive point-of-sales, inventory management and employee time system. The owners were shocked that they could now see when the busiest times of the day, week, month. Additionally, they now had data to see what employees were effective salespeople and which ones needed training.
The imperative step that this entrepreneur did was to invest in a system that allowed them to get the data that was critical. This may require the investment of a new system, but this is not necessarily a monetary investment. It can simply a new system that captures critical information. The key is to capture the data!
Step 3: Share the KPI with your entire team. For example, I once knew a lawn care company whose biggest expense was salary, and since they paid their employees hourly (but received payment based upon project), the KPI they tracked was average time spent on the job. The company then compared similar jobs across their crews to determine what an acceptable baseline is based upon the complexity of the job. When this data was shared across the company, the bidders now had a more accurate measure of how long it would actually take to complete the job, managers now had a baseline to track progress, even the equipment maintenance crew was able to use this to prioritize the equipment repair queue.
By sharing the KPIs with your entire team (I would recommend starting with your leadership team to get their buy-in), you will be motivating them to see their work as supporting your KPI. It is absolutely amazing to see an entire team working together for the same objective.
4. Periodically audit your KPIs. The amazing thing about being your own boss is that you can adapt quickly. If you have not tracked KPIs before, do not be surprised if the first one you track is not the most meaningful one. One word of caution, do not become susceptible to shiny object syndrome. Give yourself at least 3 months (preferably) 6 months before you change KPIs. It may take at least 3 months to train your staff and tweak your data gathering system.
Entrepreneurs are comfortable with operating in a world that has limited data; but there is a difference in not knowing data that is external to your company and not knowing data that is within your capability to capture and track. Tracking and communicating what is critical to your business should be a discipline that every entrepreneur develops.
Being an entrepreneur is one of the most difficult and demanding things you can do. The good news is that entrepreneurship today is a team sport. Hit the connect button on LinkedIn or Facebook NOW and together we will work towards hitting your 10-year target. Along the way we will increase your profit, strengthen your leadership skills and define your strategic vision. This will lead to confidence in your path, freedom to dream up bigger targets and a strategic banking relationship. When we connect, tell me the KPIs that you track (or the ones you are going to start tracking).
Greg Martin is an entrepreneur’s insider to the banking industry and passionately believes that every person was uniquely designed for a higher purpose and calling. Greg guides entrepreneurs in defining and achieving their purpose and calling. His deepest passion is living life with his wife and their wonderful son.
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