KPIs: How to Measure Your Business Performance.

KPIs (Key Performance Indicators) provide an effective way to measure your business performance using both leading and lagging indicators to make better decisions and drive growth.

Small business owners often rely on gut feel or a quick glance at their bank balance to gauge how their business is performing, but that approach leads to reactive decision-making and missed opportunities. In this episode, Henry Lopez explains how to use Key Performance Indicators (KPIs) to measure business performance more accurately and proactively.

He breaks down the difference between lagging indicators – such as revenue, profit, and cash – and leading indicators like leads, conversions, and customer activity, which help predict future performance. By understanding and tracking both, small business owners can gain clarity and control instead of simply reacting to past results.

Henry also shares a simple framework for selecting KPIs, emphasizing that most small businesses should focus on just three to five core metrics that are measurable, aligned with business goals, and reviewed consistently. To make it practical, he walks through a sample KPI scorecard that includes revenue, profit, cash, customer flow, and customer retention, while reinforcing that these are starting points, not a one-size-fits-all solution.

“You can’t improve what you don’t measure, but only if you’re measuring the right things,” Lopez explains, highlighting the importance of choosing the right metrics for your business.

KPIs: How to Measure Your Business Performance – FAQ:

Henry Lopez  00:13

Welcome to the how of business podcast. This is Henry Lopez, and on this episode, I’ll cover the fundamentals of KPIs, key performance indicators to help measure performance so you can make better decisions and grow your business. Because knowing how your business is performing should not just be about gut feel or checking your bank account balance at the end of the month. You should instead use a few critical measurements that tell you the truth about how your business is doing. You can find all of the how a business resources, including the show notes page for this episode, and learn more about my one on one and group coaching programs at the Howard business.com I also invite you to join the how a business community on Patreon, and please subscribe wherever you might be listening so you don’t miss any new episodes. If I asked you how your business is performing right now, what numbers would you point to? And are those numbers telling you what has already happened or what’s about to happen, or perhaps both, in the context of what we’re talking about here in this episode, your numbers are not just your financial statements, although your financial statements may well contain one of your KPIs, one of your financial KPIs. We’re talking about your broader KPIs, those high level key performance indicators, and it should be a small set of numbers that tell you how your business is really performing. There are lagging indicators, or KPIs. Those are the ones that tell you what has already happened, and they usually make up the bulk of the numbers that we measure, things like revenue, profit, cash, those things that happened in the past, and going back to the financial statements, that’s often where those numbers come from. If we’re talking about financial KPIs, leading indicators, which can be much more powerful, but trickier, maybe harder, to measure with accuracy, are what’s coming now we can measure things like leads, and even though we’ve measured them for last month, they can be an indicator of what’s to happen, which is sales or opportunities, we can measure conversion rates and then apply that to that pipeline that we might have if you have that type of business. It allows us to predict what’s coming in our business. And the more sophisticated you get, those leading indicators can be really powerful. The key thing is that you should be tracking lagging and also leading indicators as much as possible. The challenge that we’re trying to address is not tracking anything at all, or maybe tracking a couple of financial numbers off of your financial statements. That’s better than nothing, but ideally, you want to measure things a little bit more accurately and broadly, so that you have a dashboard of those key metrics, those KPIs, that help you really measure the performance of your small business, that then leads to better decision making and clarity about your business.

You’ve probably heard the quote from Peter Drucker, quote you can’t improve what you don’t measure end quote, and that’s absolutely true, and it applies to small business, but only if you’re measuring the right things. So on this episode, I want to focus on, how do we measure the performance of your business using the right KPIs. So let’s talk about why KPIs matter. I did a deeper dive on this as it relates to your leadership team on episode 598, nine. Know the score. Do your leaders know the score? But here in this episode, I’m talking about your high level KPIs at the owner level, and those KPIs which are at a higher level, understandably, sometimes they’re shared, but typically at a higher level than your leaders or your team or your managers might have at their level. But remember, if we don’t know the score, you can’t win in this game of business. So in that episode, I talked about how you have to set company level KPIs, but then your team has to have KPIs. From a business perspective, KPIs help you create focus, alignment, objectivity, and, of course, better decision making. Without KPIs, our business can drift, and we won’t know about it until it’s too late, because looking at what’s left in the bank account is definitely a lagging indicator. By the time we look at that, it could be too late to make a correction. And so with KPIs, your business becomes much more predictable and manageable, and that’s the key to achieving the growth that you want to achieve with your small business. Now how do you choose the right KPIs? Well, before you get to specific KPIs, here’s how I suggest that you think about them first. If you don’t have KPIs at all. Now, maybe you’re just looking at your financial statements, but you don’t have a KPI dashboard, I want you to really try to limit it to three to five KPIs. Don’t overdo this unless you’re already there, and you’re ready for that next level of sophistication or measurement. So three to five KPIs focus on outcomes, not necessarily just activity. So it must be that it’s measurable, it’s clear and can be consistently reviewed, and of course, that you’ve got the data to measure and you want to tie it as much as possible to your overall business goals. Now this goes back to having some form of goals, a strategic plan for the business, definitely some level of goals that you’re reaching for for this year. Remember that clarity drives performance and measurement sustains it. So what might this look like in practice? Well, I have a new download for you on the show notes page for this episode at the Howard business.com and it’s called a KPI scorecard. And it’s just a simple Excel spreadsheet that’ll let you track your KPIs. And if you don’t have KPIs today, or you’re not sure if you’re tracking the right things, here’s a simple place to start and use that scorecard, that spreadsheet to track your KPIs. It has some placeholder KPIs that are, think are the five or so KPIs that I would suggest you start with. Now, these are cross business, so you’ll have to adjust them for your specific industry and type of business. But mostly these five KPIs, or type of KPIs, apply to most businesses. The first one is revenue. Now that’s a lagging indicator, as I mentioned earlier, but tracking your revenues monthly, and then, of course, you’re measuring growth over that same month previous year. So that is a key measure, a revenue target, or sales or income, whatever you might call it. It’s a basic measure of growth, and it validates that there is growing demand for what you’re offering. The second important KPI is related to profit. At the end of the day, that’s what we’re in business for, is to generate a profit. And I’m talking about net operating profit before debt service, and before federal taxes or state taxes. So the net profits of the operation, all of the revenue and income, minus all of the expenses, and then that profit. Now, depending on how you measure things, you may or may not include your compensation in there. It just depends on how you measure the operating profits of the business. This is, of course, measuring profitability is the true health of the business. If we’re not profitable, then the business is not healthy. Something’s broken, probably something broken with the business model. And again, profit we’re going to measure on a period of time. It is another lagging indicator, and ideally, we’re also comparing it to same period previous year, but also against our goal, just like with revenue against our goal that we’ve set for the year. And then, of course, that annual goal for a lot of businesses needs to be broken up by quarter or even by month, to allow for the cycles in your business. This is a key KPI that everybody should be measuring. Now, in addition to profit, I don’t have it on my list of five, but depending on your business, especially if you’re in E commerce or retail or manufacturing, or any business that has cost of goods sold, then you should also have gross profit and gross margin. That’s just the percentage expression of gross profit. That should be a critical KPI for you as well. So we have profit. And depending on your business, if you’ve got cost of goods sold, you should also have gross margins or gross profit. All right. So so far, I’ve got revenue or income or sales, whatever you call it, I’ve got profit, net operating profit and gross profit if your business has cost of goods sold. The third recommended KPI is some form of measurement of cash, of your cash and your cash position, your working capital balance, your cash balance. And part of it is also predicting, although it’s not necessarily. KPI, but predicting your cash flow if you’ve got cash flow constraints in your business, and usually businesses that either have inventory or receivables are prone to having cash challenges. But what is that cash balance? How are we doing with working capital? That’s a critical KPI that you may want to measure for your business. The fourth is what I generically am labeling customer flow, because it depends on your business, whether that’s a lead or and or conversion rates or a number of customers. It depends on what it is that you’re measuring. But that’s how are people flowing through your business? So it could be leads, and then how are you converting at what percentage are you converting those leads on a monthly basis? That allows us then to begin to predict that pipeline of business. And the better you have that data, the more accurate that measurement is. That allows you to make this a leading indicator of what’s to come into business, or it could be number of users, number of memberships. That’s what we refer to as customer flow. You’re going to adjust that one and even in the sample dashboard that you can download to what’s specific and applicable to your business. And number five is some KPI related to customer retention, whether that’s a repeat customer percentage or actual client retention or churn, you have to measure what’s happening there. And this is a hybrid type of KPI. It tells you what’s happened in the past, a lagging indicator, but it’s also a leading indicator, because it can foretell what might be happening as people are responding or reacting or maybe not continuing their membership or subscription, for example. So those are the five KPIs. The first one was revenue or income or sales. The second was profit, both net operating profit and gross profit if it applies to your business. The third was cash, measuring your cash position. And that can also turn into not just a KPI, but Cash Forecasting, if your business needs that. The fourth was customer flow, some type of KPI, or maybe it’s more than one KPI, to track what’s going on there in a way of flow into your business of clients, customers, patients, whatever the case might be. And number five is, how are you retaining those customers or those clients or those patients? Another one that you might throw in there is customer satisfaction of some sort, whether it’s Google reviews or some other type of survey, but measuring how you’re performing and how you’re keeping those customers or clients, that’s a key KPI that you should have on your high level, company level dashboard for what you’re measuring. So by having these top KPIs, three, five, no more than 10 at the most, this is how you actually measure and manage the performance of your business instead of just reacting to what’s happened in the past. What are some of the common mistakes I see with KPIs, especially when you’re starting to use KPIs to help you manage and navigate your business. Mistake number one is too many KPIs, so start with three to five if you’re not doing this already. The other mistake is measuring activity, or just measuring activity instead of outcomes. Of course, not knowing how the KPI is calculated is a big one. You should know how you’re measuring it and what is the source of that data. How do you calculate that particular KPI? And then a consistent review cadence when people don’t do that, when you put this together once, and then maybe look at it at the end of the year, when it does you no good to help you navigate your business. You should be reviewing your KPIs at least monthly. In some cases, if it’s critical, like cash, for example, you might be reviewing it weekly, but I think monthly is a good cadence to have a high level, CEO level, owner level KPI dashboard, and you’re reviewing that on a monthly basis to help you make decisions about your business. So to get started, choose three to five KPIs. Define the target. What’s the goal? Here’s one thing to measure it. But what are we measuring it against? Now, in some cases, a KPI like revenue, certainly we’re measuring it against last year. But what was the goal for this year? Were we planning to grow 10% were we planning to stay flat? Typically, we have growth goals that we need to have as targets for these KPIs, two different worksheets that I’ll have on the show notes page for this episode at the Howard business.com One is the leadership KPI worksheet. This is a worksheet I had also made available for the previous episode about making sure your leaders know the score. That one helps to establish your KPIs at a high level. But then also, if you have a team what KPIs, they need to have that roll up to your high level dashboard of KPIs. And then, speaking of a dashboard, I’ve created a new download. It’s a Excel spreadsheet that can serve as your KPI dashboard. So you’ll make changes to the KPIs in this spreadsheet, and then it’ll allow you to track month over month so that you can see how you’re trending and use it as a dashboard for you to look at and review and analyze your KPIs on a monthly basis. So get those two downloads at the show notes page for this episode at the Howard business.com I think these two will. Skills, and by keeping track of these KPIs, will give you a simple but effective performance measurement system. So first you’ll define your KPIs. Then you have to track them consistently, and then use a tool like this dashboard to track them as well as to review them on a monthly basis. So when it comes to KPIs, you don’t need a lot of complexity. You don’t need a lot of numbers. In fact, that becomes overwhelming and not as powerful. You need clarity. You need simplicity. Most small businesses can be measured as far as how they’re performing by five to 10 at the most high level KPIs. I’m talking about the high level KPIs that you need to be focused on as a business owner. Remember the concept of the value of lagging and leading indicators and needing a little bit of both what’s happened in the past, which is, of course, a predictor of what will happen and a measurement of what we’ve done, but also leading indicators that help us to predict what’s coming into business and allow us to adjust as well. KPIs aren’t just numbers. They’re how you manage and measure the performance of your business. What gets measured gets improved. So start by tracking the right numbers, and your business will tell you what to do next. The numbers don’t lie. It’s not the only data input for you, but it’s key to have these numbers and to help you make decisions so that you can continue to grow your successful and profitable Small Business. This is Henry Lopez, and thanks for joining me on this episode of The how of business. I release new episodes every Monday morning, and you can find a show anywhere you listen to podcasts, including the how of business, YouTube channel and at my website, the how of business.com thanks for listening.