SMART KPIs may be a new concept for you. However, you’ve probably heard of SMART targets or objectives which are often used for employee performance measurement. SMART stands for Specific, Measurable, Accepted, Realistic and Time-bound, but what does this mean when applied to KPIs?
KPIs, or Key Performance Indicators, are metrics that businesses can track over time to identify progress (or lack of progress) toward their targets. Targets are long-term goals such as a 10% year-on-year increase in net profit. So use a SMART KPI focused on net profit to monitor your success monthly or quarterly towards reaching your target.
Therefore when you closely monitor your SMART KPIs, you’ll know whether your target is challenging enough or perhaps too challenging. In addition, you’ll get vital information during the target period rather than waiting until the end. In much the same way that mid-term tests and mock exams help students review their progress toward their final exam, KPIs help business owners monitor how well they are doing.
How do I choose which SMART KPIs to track?
To clarify it’s important to realise there are dozens, if not hundreds of possible SMART KPIs you could track. Therefore you must use your overarching business goals to help you decide which ones to focus on. If you are looking for performance improvement in your company’s profitability with the aim of selling it, you’ll need different KPI’s than if you are looking to put your business on the map for the best customer experience, for example. So your KPI’s must align with your ultimate goal setting for your business.
7 SMART KPIs suitable for most businesses
Therefore your ultimate goals will drive your choice of SMART KPIs. There are a few which are likely to be most useful to most businesses.
Net Profit Margin
Unless you are a charity or not-for-profit organisation, you are in business to make a return for yourself or your shareholders. So, the best place to start with SMART KPIs is the net profit or net profit margin.
Net profit is the amount of money that a company makes after it has paid all of its expenses. That is to say the most basic measure of profitability. Net profit margin expresses your net profit as a percentage of your turnover. If your turnover is £100,000 and your net profit is £30,000, your net profit margin is 30%.
Breakeven point
The breakeven point comes when your total sales are equal to your total costs. You’ve not made any profit, but you also haven’t made a loss. You can calculate how many units of product you need to sell, taking into account your fixed and variable costs to break even. For example your fixed costs are £6,000. Secondly our variable costs are £2 per unit and you sell each unit for £8.
The formula for breakeven units = Fixed costs/(price-variable cost per unit), in this case = 6000/(8-2) = 6000/6 = 1000 units.
In other words calculating the breakeven point for service businesses can be trickier than a product-based business. It may not be so obvious what constitutes a unit of service. It’s up to you to determine what you want to use. It could be an hour of work, a treatment, a course, customers, a subscription and so on.
Operational gearing
This SMART KPI is the ratio of fixed costs to total costs. Operational gearing is an important metric as it shows how much risk is baked into the way your company operates. Consequently the higher the operational gearing ratio, the greater the risk. Fixed costs have to be covered before the business becomes profitable.
As an example, let’s look at two companies to compare:
Company A has fixed costs of £150,000 and total costs of £300,000.
Company B has fixed costs of £50,000 and total costs of £200,000.
The operational gearing ratios are 150000/30000 or 0.5 for Company A and 50,000/200,000 or 0.25 for Company B.
An operational gearing ratio of 0.5 or more is considered high, meaning increased risk for the business.
Customer Lifetime Value
Customer Lifetime Value (CLV) measures the total sales you can expect to make from each customer over the course of your relationship with them. You can calculate this as:
Average customer value x average customer lifespan.
To clarify, you can calculate the average customer value by taking the average order value and multiplying this by the average order frequency rate.
This metric is important because it’s almost always easier (and therefore cheaper) to sell to an existing customer vs. a new customer. You’ll want to track the CLV and aim to increase this over time. Do this by using sales and marketing strategies that offer existing customers additional products or services. When you know your CLV, you’re empowered to make better customer acquisition decisions. If you know your CLV is £10,000, you can confidently spend more acquiring new customers than if your CVL is £200.
Days Sales Outstanding
Many businesses fail not because they don’t manage their cash flow adequately. In other words, they run out of money and can’t pay their bills on time.
Therefore try to avoid problems with your cash flow by using the Days Sales Outstanding (DSO) SMART KPI. DSO measures the average number of days it takes you to receive payment for goods and services you provide to customers on credit terms. The higher the DSO, the longer it takes you to collect payment from your customers.
So while you’re waiting to be paid, your bank balance is lower than it could be. Consequently, you may not have enough money to pay staff or suppliers. However, tracking your DSO and finding ways to reduce it over time can positively impact your cash flow and keep your business solvent.
Calculate DSO as follows: Total accounts receivable/Total credit sales for the period * Days in the period.
For example, let’s say Company C has total accounts receivable of £250,000. It made £285,000 in credit sales in the month of May. The DSO is 250,000/285,000 * 31 = 27.2.
DSO under 45 is considered good but anything you can do to further reduce this will benefit your business liquidity.
Customer Satisfaction Score (CSAT)
Your business might not be making sufficient sales to remain profitable if you are having issues with customer experience. Without customers, your business cannot survive. Making sure you keep them happy must be a top priority. You’ll get a huge competitive advantage from creating a great customer experience. You’ll retain your customers and perhaps even win some from your competitors. That’s why running regular customer surveys and asking for feedback on your end-to-end customer journey can provide golden nuggets of wisdom for how to make positive changes that will delight your buyers.
You can decide how your customers rate your service using a customer satisfaction KPI. Here’s an example:
Customer satisfaction KPI
| Customer satisfaction level | Score |
|---|---|
| Very satisfied | 5 |
| Somewhat satisfied | 4 |
| Neutral | 3 |
| Somewhat unsatisfied | 2 |
| Very unsatisfied | 1 |
You might choose to work out your total CSAT score by adding together all the points for very satisfied and somewhat satisfied customers together and then dividing by the total number of respondents to the survey to get your average CSAT score. However, you might choose to only use the very satisfied customers to work out the overall satisfaction rating. CSAT = (Number of customers who are satisfied / Total number of customers) * 100
Focusing on improving your CSAT score over time will help you retain customers for longer which will also improve your Customer Lifetime Value KPI.
Employee Net Promoter Score (ENPS)
‘Above all happy employees ensure happy customers. In other words happy customers ensure happy shareholders – in that order’ according to Simon Sinek. It’s not rocket science though. When your employees are happy in their workplace, productivity and motivation to achieve more and work smarter go up. Then you’ll see higher sales, lower absences and reduced staff turnover. As a result, you’ll hit your business targets more easily. When customer-facing staff are happier, the service customers receive improves. So, it follows that you should be making sure that your workforce enjoys coming to work, is motivated to work towards the company’s goals and objectives and feels valued and properly rewarded.
Certainly employee Net Promoter Score is a metric that can help you assess the temperature of your staff satisfaction. Net Promoter Score usually uses a sliding scale of 0-10. Promoters are those scoring your business as a 9 or 10. Neutral scores are 7 and 8 and detractors are scores of 6 or less. The formula you’ll need is (number of employees who are promoters /number of employees) * 100.
What other SMART KPIs could I track?
In short, here are some other performance measures you could consider to help you track your business progress. Most importantly be wary of trying to track too many different metrics. As a result, you can find yourself in measurement overload. So this can lead to a lack of focus on the most pressing issues in your business. As your business changes, your KPIs can change to reflect the areas of your company that need improvement or closer monitoring.
| SMART KPI name | KPI calculation | Why track this KPI? | Benefit of tracking over time |
|---|---|---|---|
| Liquidity (quick ratio) | Current assets/current liabilities | Tracks the liquidity of the company | Helps identify if there’s a danger of the company becoming insolvent (unable to pay its bills on time) |
| Return on investment (ROI) | ROI = (Net profit / Total investment) * 100 | Measures the financial return on a business investment | Helps to make better investment decisions |
| Customer acquisition cost (CAC) | CAC = (Total marketing and sales costs) / (Number of new customers acquired) | Measures the cost of acquiring a new customer | Helps to determine the profitability of marketing and sales campaigns |
| Churn rate | Churn rate = (Number of customers lost / Number of customers at the beginning of the period) * 100 | Tracks the percentage of customers who stop doing business with the company over a period of time | Helps to identify problems with the product or service, the customer experience, or the marketing and sales efforts |
| Sales per employee | Sales per employee = Total sales / Number of employees | Measures the productivity of the sales team | Helps to identify top performers and areas where sales can be improved |
| Return on advertising spend (ROAS) | ROAS = (Total sales / Total advertising spend) * 100 | Measures the effectiveness of advertising campaigns | Helps to determine the best channels and strategies for advertising |
| Gross margin | Gross margin = (Total revenue - Cost of goods sold) / Total revenue | Measures the profitability of the products or services sold by the company | Helps to identify areas where costs can be cut or prices can be increased |
| Inventory turnover | Inventory turnover = (Cost of goods sold / Average inventory) | Measures the efficiency with which inventory is managed | Helps to identify areas where inventory can be reduced or sales can be increased |
| Lead conversion rate | Lead conversion rate = (Number of leads converted / Number of leads generated) * 100 | Measures the effectiveness of the marketing and sales process | Helps to identify areas where the marketing and sales process can be improved |
| Website traffic | Website traffic = (Number of unique visitors to the website / Total number of visitors) * 100 | Tracks the number of people who visit the company's website | Helps to identify the most popular pages on the website and the sources of traffic |
| Bounce rate | Bounce rate = (Number of visitors who leave the website after viewing only one page / Total number of visitors) * 100 | Measures the percentage of visitors who leave the website after viewing only one page | Helps to identify problems with the website's design or content |
| Average order value (AOV) | AOV = (Total sales / Number of orders) | Measures the average amount of money spent by each customer | Helps to identify products or services that are popular with customers and set prices accordingly |
| Employee turnover rate | Employee turnover rate = (Number of employees who leave the company / Number of employees) * 100 | Tracks the percentage of employees who leave the company over a period of time | Helps to identify problems with the company culture or management |
| On-time delivery rate | On-time delivery rate = (Number of orders delivered on time / Total number of orders) * 100 | Measures the percentage of orders that are delivered on time | Helps to identify problems with the shipping process and improve customer satisfaction |
SMART KPIs to help you achieve success
In conclusion, when you understand your key performance indicators, you have a much greater chance of business success. Therefore using SMART key performance indicators alongside your targets means you’ll always know whether you are on track or you have more work to do. Likewise having a flexible yet robust financial plan for your business is not a privilege, it’s a right. Most importantly the Numbers Knowhow financial modelling software puts you in control of your business finances, ending sleepless nights and anxiety of not understanding your financial figures. Get in touch today for your free trial so you can make your business and personal financial dreams a reality.