By Yaw Ananga
Pay attention to your metrics
You may have heard the saying, “What you cannot measure, you cannot manage.” Although this is not entirely true, virtually anyone interested in performance improvement sees the value of measurement. However, average small business owners typically receive operational and financial information too late to act on it. End-of-month business statements are backward-looking, showing what has already happened and often leaving you little opportunity to make timely corrections.
A key performance indicator, or KPI, is a number that shows the direction in which an important part of the business is trending, either moving toward or away from its benchmark. The main financial statements small businesses use, namely the Profit & Loss Statement (P&L) and the Balance Sheet, are primarily lagging indicators. This is because they report financial results and conditions arising from activities that have already occurred, although certain metrics derived from them can provide leading insights into future business performance.
A leading KPI, typically operational in nature, is a forward-looking measure that helps predict future business performance. For example, next week’s bookings for an HVAC service business generally tell you whether business is going “to be good” that week or not, thereby providing you with an opportunity to dial up short-term marketing, e.g., pay-per-click on Google, to close the gap. It measures the activities, behaviors, or conditions that drive results, thus allowing management to take corrective action before problems occur. Not every number is a KPI; to be a true KPI, it must connect to a result the owner can influence.
A short early-week review gives leadership an early warning while there is still time to respond. It must be noted that the goal of these reviews is not to create another report or overwhelm the owner with needless data. The intent is to establish a small, reliable set of forward-looking numbers that lead to better questions and result in faster decisions and clear accountability at the start of each week.
Numbers tell you where the business is headed, not just where it has been
As an example, let’s consider a small plumbing company with a handful of employees. Every Monday morning, leadership reviews new service requests, notes jobs scheduled for the next two weeks, and tracks overdue customer invoices. Let’s say the owner discovers that new service requests have declined 25% over three consecutive weeks, even though revenue remains strong.
This is a call to action. Rather than waiting for declining sales to appear in the monthly financial statements, the owner immediately investigates the cause and increases marketing efforts. In effect, you identify potential problems early enough to take corrective action before they affect profitability.
Here are a few best practices in identifying and measuring KPI’s:
- Balance leading and lagging indicators: A good mix of leading and lagging indicators is imperative because together they offer a more balanced view. For example, while revenue and profit confirm your past performance, indicators such as new leads, qualified opportunities, and proposals issued are forward-looking and can signal what is likely to happen next.
- Connect the weekly KPIs to cash and profit: As the saying goes, in small businesses, cash is always king. Make sure to include the few operational measures that eventually drive financial results, such as gross margin on new work, cash balance, or overdue receivables. It is important to understand how movement in each number affects cash flow or profitability.
- Targets, trends, and exceptions reveal the picture: A number by itself typically provides little direction. The key is to set a benchmark and compare each KPI with a weekly target. The prior several weeks, or industry standards, can be a good starting point in setting a benchmark. The purpose is to identify a developing pattern before it becomes visible in the monthly financial statements.
Get reliable numbers without adding hours of manual reporting
Many small business owners worry about getting bogged down in reports that take time away from running the business, and rightly so. Here are a few tips to manage your reporting efficiently:
- Start with a small scorecard: Select roughly five to ten measures that influence the most important objectives. More isn’t always better, and chasing KPIs shouldn’t become a job. Consistency is key, and a short report that is consistently updated and reviewed is way more valuable than a large dashboard that takes hours to prepare, overwhelms everyone with data, and is eventually abandoned.
- Use your existing systems as the source: Avoid reinventing the wheel as much as possible. Shifting to a data-driven management mindset is hard enough, and you don’t need to jinx it by implementing new systems if they aren’t needed. Pull information from the accounting system, point-of-sale platform, CRM, or operational tracker already used by employees. It is good practice to define one authoritative source, one owner, and one calculation method for each KPI. Don’t let perfection get in the way of good.
- Build reporting into normal work: Capturing data in real time or as close to real time as possible is always better. Whenever possible, capture information when the activity occurs rather than reconstructing it after the fact. Standard fields, scheduled exports, and automated dashboards can reduce manual work; however, ensure that the underlying data-entry habits are consistent first.
What to do when a number goes in the wrong direction
- Avoid knee-jerk reactions and confirm the number before reacting: Make it a point to check the source, timing, and completeness of the data. A bad result may reflect a genuine problem; however, it may also indicate a one-time event or a reporting error. Verification prevents the owner from making a costly decision based on unreliable information.
- Go beyond the symptom to the root cause: The best use of data involves questioning instead of taking things at face value. Ask what changed, when it changed, and which activities produced the result. For example, if sales are down, you could examine your leads, review what your conversion rates are, and calculate your average sale. If cash is tight, you must get in the habit of examining collections, cross-checking your inventory, reviewing your margins to ensure you are pricing appropriately, and matching your current cash position against any significant upcoming payments.
- Always follow up: Measurement without action is pointless. Decide what action to take, identify the champion (the employee who owns it), and set when the KPI will be reviewed again to establish a cadence. A red number without an owner or deadline becomes background noise. The next Monday meeting should show whether the corrective action improved the result; if it did, then it is a lesson learned and can be crossed off. If it didn’t, dig further.
No time like the present
Don’t wait until the end of the month to learn that your business is drifting. A focused Monday scorecard turns operating activity into an early warning and decision system. The value does not come from tracking dozens of measures. The real value comes from choosing a few meaningful KPIs, defining them clearly, producing them reliably, and reviewing them consistently.
Put these principles into action right away and see how they transform your processes. Review and refine as you go along, and do not be anchored to a particular kpi if it is not producing the actionable information needed to improve performance.
