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Bob Maiden, CPA

Partner of Stony Hill Advisors LLC

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KPIs Are for Small Companies, Too

August 05, 2016

KPIs are a valuable piece of standard metrics and management reporting.

When your $8M business gets acquired by a $2B public company and continues to operate as an independent business unit, life changes in many ways. One of the most significant changes is the significant amount of new reporting requirements: forecast updates, flash reports, key performance indicators (KPIs), etc. And while much of this may seem like information overload, KPIs can quickly become a valuable piece of standard metrics and management reporting. And unlike financial reporting, which is not fully disclosed to the entire company at your typical private enterprise, KPIs are designed to be openly communicated throughout the company.

By definition, a KPI is a measurable value that demonstrates how effectively a company is achieving certain key business objectives. And unlike financial reporting that is standardized by generally accepted accounting principles (GAAP), KPIs vary greatly by the type of business and are entirely determined by the management team. KPIs, if designed properly, should focus on many different areas of your business. You might have KPIs that measure results in Marketing, Quality, People, Customer Support— areas that are only summarized by line items in your financial reporting.

KPIs should be designed to map directly to your strategic goals. For example, let’s say you’re a $2M business and have a goal to grow revenues by 5 percent each quarter or $25K per quarter. Let’s also assume each new customer contributes, on average, $5K per quarter, so you need to add five new customers per quarter to reach your goal. If new customer acquisition at your business is generated by marketing campaigns that generate leads that your sales team converts to customers, you should consider having both marketing campaign and lead conversion KPIs. If you know from past history that you convert 25 percent of new leads into customers, your marketing campaigns need to generate 20 new leads per quarter to meet your sales growth goal. In the event you are falling short of your goal, your KPIs will help you determine if the issue is a marketing or sales team issue.

Another benefit of KPIs is accountability. Department managers should have considerable input in determining the KPIs that have the biggest impact on their department’s performance. For example, let’s assume you have a call center. A few KPIs to consider might be: average hold time; call success rate (i.e., was the issue resolved to the customer’s satisfaction), or customer satisfaction score (i.e., based on post call survey responses). KPIs can be financial as well. When a company I worked at was acquired, the primary reason was to generate new business by leveraging our technology with our parent company’s large customer base. So our top KPI was percentage of new business generated by intercompany leads. Some of our other KPIs were customer retention rate, employee turnover rate, and number of software quality defects. Start small with a manageable number – perhaps one per department.

The bottom line is that KPIs are not just for big companies. And if you ever talk to a larger company about a potential sale of your business, they will be quite impressed.

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