How to Develop KPIs: The Do’s & Don’ts for Strategic Goal Setting

Key performance indicators (KPIs) are quantifiable measurements that allow small businesses to evaluate the progress they’re making to reach desired goals. But too many KPIs or irrelevant KPIs can steer you away from what truly drives your business. Learn how to develop KPIs that are more than simple metrics—they’re strategic north-stars to align the business towards a common vision.

KPI Development Guides Goal Achievement

Most businesses have a host of metrics available from their internal and third-party data. KPIs are a handful of those metrics that a business has identified as being key indicators of success. The idea here is that if a business’s KPIs improve over time, the business is improving toward its goals, and vice versa. By narrowing focus from large sums of data to a few trackable metrics, executives can more easily see their performance trends.  

KPIs can serve as an important tool for your organization. They…

• Act as a company health scorecard
• Measure progress over time
• Identify when to take corrective action
• Identify performance patterns

Define the Types of KPIs Most Relevant to Your Business

Each small business will have different KPIs tailored to their business situation. Companies usually narrow down to two up to four core KPIs per business objective. These core KPIs allow the company to track its progress toward each goal and take actionable next steps.

• Financial KPIs: These KPIs use financial statement data to measure the financial health and performance of the business to help achieve, for example, better profit margins, cash flow or greater revenues. 
• Customer KPIs: Customer KPIs evaluate the performance of your services or products. They provide details regarding customer purchasing trends, demographics, loyalty, satisfaction and more. Specific KPIs may include customer lifetime value or customer acquisition costs.
• Process KPIs: These measure operational performance to evaluate efficiencies, product quality and throughput. Businesses may measure production cycle times, inventory turnover and quality KPIs, such as defect rates. 
• People KPIs: People KPIs focus on staffing resources. They can analyze employee retention, employee satisfaction, turnover rates, overtime and productivity.
• Marketing KPIs: These evaluate the success of marketing efforts, such as lead generation, conversion rates, SEO rankings and social media or email marketing engagement. 
• Sales KPIs: These monitor sales performance, including both sales performance and sales process. Common KPIs may include average deal size or sales cycle length.

Not every KPI will apply to every business. Process KPIs are usually emphasized by manufacturers, while customer KPIs can include retail stores or service-based industries. Keep your company’s focus on the most relevant KPIs, sticking to three to five KPIs per business area and a handful of KPIs for the company as a whole. 

Your KPIs may also change as you grow or enter new business ventures. However, there are certain KPIs that will always stay the same. “Winning and losing—those metrics typically don’t change,” says fractional finance expert Askia Roberts. Did you sell as much as you expected? Did your costs increase? Did your cash decrease? The metrics that define whether your business loses or thrives will be evergreen. 

As you grow, you may be more concerned with returns on new investments or risks that are around the corner, and so KPI development will adjust based on your strategy. 

What Are S.M.A.R.T. KPIs? How to Develop KPIs With Specificity

Your KPIs should be specific to your business—but they should be comparable enough with competitors to benchmark performance within your industry. 

KPI development can follow the same steps outlined in S.M.A.R.T. methodology. S.M.A.R.T is a framework used by small businesses to evaluate objectives and to select the actionable metrics that matter to your company.

S.M.A.R.T. strategic objectives meet the following criteria:

• Specific: A clear outline on what the business is trying to achieve, when it is trying to achieve it, and how it is going to get there
• Measurable: An objective that is clearly measurable using existing business metrics
• Attainable: A business goal that can be achieved with clear, actionable next steps
• Relevant: An objective that will contribute to the overall performance and success of the organization
• Time-Bound: A goal with clear time frames or deadlines

Create objectives that meet a common business goal but that can have varying levels of granularity. Make your performance goals and outcomes very clear to the rest of your organization or outside stakeholders. Oftentimes, business goals are high-level, so it’s not always clear what achieving that goal looks like.

For example, if the company’s goal is to increase new customer acquisition within the next year, it may measure success as an X% increase in new customer purchases in a one-year time frame. Thus, it’s important to set clear definitions of success for each objective.

Can Your Business Easily Track Business Performance Data?

Business data can come from many avenues: both internally and externally. You need a way to extrapolate, capture and organize this data before creating your KPIs. Creating a solid data structure that only pulls out relevant information and automatically categorizes it allows you to focus on what data is important to business goals. A data infrastructure can vary from data visualization tools, interactive dashboards, customized apps and other resources.

When you have the data infrastructure in place, you can ensure information accuracy and transparency throughout the company. Then you can successfully use this infrastructure to monitor and track KPIs to provide real-time information and reports.

Steps for Creating a Strong KPI System

Avoid pitfalls across the KPI development process. Here are ways that you can keep it simple and avoid misalignment or inconsistent reporting.

Step 1: Define your business goals

• Do: Identify what matters most to your organization’s success.
• Don’t: Lose consensus with multiple definitions of success.

Step 2: Identify key performance areas

• Do: Pinpoint the critical aspects that drive your business forward.
• Don’t: Overcomplicate things with too many KPIs. 

Step 3: Create S.M.A.R.T. KPIs

• Do: Establish realistic goals based on historical data and industry standards.
• Don’t: Establish KPIs that are not actionable. 

Step 4: Assign ownership and accountability

• Do: Determine who’s responsible for monitoring, reporting and driving each KPI.
• Don’t: Assume that a goal only has one KPI to track. 

Step 5: Implement data collection and reporting

• Do: Set up reliable systems to gather accurate, timely data with tools like analytics platforms, CRM software and financial reporting.
• Don’t: Track KPIs where there is inadequate data or poorly defined definitions of a metric.

Step 6: Establish a reporting schedule

• Do: Decide on a regular cadence for KPI reporting (weekly, monthly, or quarterly).
• Don’t: Selectively present data that boosts performance. 

Step 7: Analyze and interpret results

• Do: Regularly review the data to spot trends and insights.
• Don’t: Lose sight of the bigger picture and external factors that may impact performance.

Step 8: Communicate findings and take action

• Do: Share KPI results with stakeholders.
• Don’t: Operate in silos or fail to tie cross-functional performance together. 

Step 9: Review and refine your KPIs

• Do: Periodically assess your KPIs to ensure they remain relevant.
• Don’t: Change KPIs too frequently or without updating stakeholders.

“People can get super fancy with KPIs and they can have these nice little red, yellow, green charts, and it could have a thousand things on there,” says Roberts.

While steps like color-coding KPI reports is a common practice to identify where performance is “in the green” or “in the red,” remember that simplicity is still key across the entire process. By following these steps and keeping your reporting streamlined, you can create a powerful performance measurement system that drives your business forward without getting lost in the weeds.

Identify the Right KPIs With a Strategic Advisor

Want to define the right KPIs for your business and set yourself up to achieve your business goals? Our fractional CFO solutions can help determine the best KPIs based on your operations as well as evaluate your data infrastructure for better goal tracking. Request a consultation with Paro to get matched with a highly vetted finance expert today.