Many business owners consider their businesses, their babies.
And what do we do for our babies? We take care of them, check in on them, and make sure they are happy.
But how do you make sure a business is happy?
Well, businesses using metrics and KPIs are actually able to see just how “happy” their businesses are through the use of business management software and reporting tools.
What is a Metric?
A metric is a quantitative measure used to track operational performance. They help to understand overall business health and most organizations include metrics that range in importance.
For example, you might track the size of orders throughout the year because you're curious of how many items customers typically buy but unless that metric is tied to a specific goal, it remains a metric. Think of metrics as data points.
What is a KPI?
KPIs (Key Performance Indicators) are the most important metrics. These indicators are sometimes vital to company growth or project success, but they do depend on the objective or goal being measured. It’s important to note the word “Key” as these indicators are specific metrics.
The distinction between KPIs and Metrics can be easily misunderstood, as they are not interchangeable terms. Think of it like this: all dogs are mammals but not all mammals are dogs - the same can be applied. All KPIs are metrics but not all metrics are KPIs.
Here are a few examples of Metrics and their coinciding KPIs.
Sales Performance
KPI example: Sales by Month
This metric measures sales performance and exposes how well the business is meeting its sales goals. Your KPIs would track the actual number of sales, sales by month/territory, average sale size, popular products etc., and can help business owners make informed decisions.
Gross Margin
KPI example: Cost of Goods Sold (COGS)
Tracking gross margin ensures a company is generating as much profit as possible. High sales volumes don’t necessarily mean high profit, you must track your Cost of Goods Sold (COGS), landed costs and others as KPIs to help determine if you are pricing your products effectively. It can also give you visibility into whether you need to review pricing tiers or discounts.
Current Ratio
KPI example: Days Payable Outstanding (DPO)
This is a metric that helps track cash flow and identifies a business’s ability to pay any short-term debt by measuring resources. Concurrently, Days Payable Outstanding (DPO) measures the number of days a business takes to pay invoices for goods and services on credit. DPO is a key metric for tracking cash flow.
SMART Goals
If you don’t know where to get started with Metrics and KPIs consider using the SMART (Specific, Measurable, Achievable, Relevant and Timely) principle to set goals and break down metrics into specific KPIs.
Once you have determined what is important enough to track, it’s now time to evaluate your current business management system(s) and determine if you are conducting the most effective way to track and keep record of all your Metrics and KPIs. Typically, introductory systems just won’t cut it and you’ll need robust business management software that can generate reports both automatically and manually.
Using business management software can help you achieve high results by enabling you to:
Align your strategy with your execution: You’ve laid out high-level goals for your business. The software should be able to manage all the small specific goals to align with your high-level goals.
Focus on what matters: You can prioritize your tasks and projects based on their impact to KPIs.
Make data-driven decisions: You can use data and insights from your KPIs and metrics to make informed business choices.
Improve continuously: You can monitor your KPIs and Metrics to learn from your mistakes and successes and implement changes accordingly.
If you plan on searching for Business Management Software, it is often used interchangeably with the term ‘ERP Software’. The great thing about this kind of system is the all-in-one aspect. It will already include reports as part of the base application but you can usually create customized reports based on your businesses KPIs. When personalizing your team's dashboards, it is as simple as a few clicks to get the right reports in front of the right people every morning.
