Understanding Key Performance Indicators for SMEs

22 Minutes

All small and medium-sized enterprises (SMEs) have heard of the term “Key Performance Indicators (KPIs)”, but not every business owner wields their power correctly. If they did, then the failure rate of small businesses would be less than 20% in the first year, and more than 30% would survive to see their 10th anniversary.

Most business failures are due to poor leadership or managerial dysfunction created by unclear objectives, which, you guessed it, could have been prevented through the use of effective key performance indicators. So what is the best thing that business owners can do? First, understand KPIs and then implement them correctly! If you do, you’ll soon see that aligning the business behind KPIs leads to company-wide effectiveness and productivity.

In this guide, we break down everything you need to know about KPIs for small businesses, so you can use them as key drivers for business growth and success.

This guide covers:

What are KPIs?
Why are KPIs important?
Performance Indicators vs. Key Performance Indicators
Understanding the difference between KPIs vs KRIs
Financial vs. Non-Financial KPIs
What is the Balanced Scorecard Approach?
How to set and measure effective KPIs for small businesses
How to spot and fix gaps in KPI measurement.

What are KPIs?

Essential key performance indicators are a collection of quantifiable measurements that act as guiding stars for SMEs. For example, these indicators reflect a company’s performance in its most crucial areas, allowing business owners to evaluate its performance and understand how effectively they are moving toward their key objectives. Whether it’s financial health, customer satisfaction, operational efficiency, or employee engagement, KPIs provide a clear and quantifiable measure of success.

Beyond goal setting, KPIs also form the backbone of strategic management in SMEs. In addition to the visionary goals, they can be used to drive specific actions and behaviours on a weekly, monthly, and quarterly basis, which the team has to follow to achieve short- to long-term goals.

Why are KPIs important?

Growth and success are significantly influenced by the effective use of KPIs. Why? Because these indicators are not just metrics; they are vital tools for informed decision-making, offering insights into how strategies and operations are performing against set objectives.

✔ KPIs measure and impact business performance, by serving as the pivotal points of reference that guide strategic decisions and operational adjustments in SMEs.

✔ KPIs offer a real-time snapshot of business health, highlighting areas that require immediate attention, thereby guiding SMEs toward areas of improvement and growth opportunities.

By closely monitoring KPIs, SMEs can track their progress, pinpoint areas that excel, and identify weak-performing areas that require improvement. For instance, financial KPIs like cash flow and profit margins shed light on the financial health of the business, while operational KPIs such as sales pipeline and inventory turnover rates provide a clear picture of efficiency and resource management. This blend of financial and operational KPIs is essential for steering SMEs toward sustained growth and development.

Tip: When it comes to KPIs for small businesses, less is often more. Aim to manage between four to eight essential key performance indicators. This allows you to gather enough data for insightful decision-making while keeping things straightforward and manageable.

Performance Indicators vs. Key Performance Indicators

It’s crucial to differentiate between general performance indicators and Key Performance Indicators (KPIs) in business, as they both have a different purpose.

Essential Key Performance Indicators >> key metrics that provide an overarching view of the business’s health and alignment with strategic objectives.

Performance Indicators >> detailed indicators that provide in-depth insights into specific operational areas and functions within the company.

As you can see, KPIs are the critical metrics that directly reflect performance of/against the strategic goals and priorities of the business, while general performance indicators act as supportive metrics. They offer more granular data and insights, like building blocks, that are instrumental in understanding the dynamics influencing the primary KPIs.

These can range from quantifying sales leads to assessing employee engagement levels, anything that offers a deeper understanding of the operational intricacies that affect overall performance.

Tip: For SMEs, it’s key to distinguish between high-level KPIs and detailed performance indicators. Use KPIs for strategic oversight and regular performance metrics for operational insights. Keeping this balance is essential for a well-rounded view of your business, blending strategic progress with operational efficiency.

Understanding the difference between KPIs vs KRIs

Both Key Performance Indicators (KPIs) and Key Result Indicators (KRIs) are vital for small businesses, but they serve different purposes. KPIs are about steering the ship in the right direction, while KRIs offer insights from the journey already travelled.

Together, they form a comprehensive view of a business’s performance and direction, essential for strategic planning and growth. So what is the difference?

Key Performance Indicators (KPIs)

KPIs are forward-looking metrics, utilised by SMEs to gauge potential future performance and guide immediate strategic decisions. They are dynamic and proactive, focusing on influencing and changing trends. Examples include monitoring current sales trends or website traffic growth – metrics that can be directly influenced by your actions now.

KPIs are about setting the course correctly for a smooth journey ahead, and assisting in adjusting strategies to meet your business targets. They are crucial for SMEs to remain agile and responsive to changing market dynamics.

Key Result Indicators (KRIs)

Conversely, KRIs are akin to your business’s memory lane. They reflect past achievements and demonstrate the results of previous strategies. For instance, annual profits or a customer´s rolling 12-month orders are examples of KRIs.

These indicators provide SMEs with a clear view of their journey so far, aiding in understanding the impact of past actions and decisions. It’s about learning from what has transpired and using that knowledge to inform future paths.

Financial vs. Non-Financial KPIs

While financial KPIs are crucial metrics, and so they should be, non-financial KPIs are equally important in any organisation’s consideration.

Financial KPIs >> indicators that provide a clear view of a company’s financial status, e.g. revenue, profit margins, expenses, and overall fiscal stability. They are indispensable for SMEs to track their financial progress and ensure alignment with their economic objectives.

Non-financial KPIs >> indicators that look at performance outside of finance, e.g. customer satisfaction, employee engagement, brand reputation, and operational efficiency. They play a key role in building customer loyalty, creating a positive workplace, and enhancing brand value, contributing significantly to long-term sustainability and growth.

For SMEs, balancing financial and non-financial essential key performance indicators is a strategic necessity. This approach ensures a well-rounded management perspective, considering both immediate financial results and long-term business health.

By attentively monitoring both financial and non-financial KPIs, small businesses can obtain a comprehensive understanding of their overall performance, guiding them towards informed decision-making that supports both short-term financial goals and long-term strategic objectives (see The Balance Scorecard Approach below).

The Balanced Scorecard Approach

The Balanced Scorecard, a strategic framework developed by Kaplan & Norton, remains as relevant today as it was three decades ago. It provides a comprehensive view of your business by focusing on four key areas: financial performance, customer satisfaction, internal processes, and learning and growth.

This approach goes beyond mere financial metrics. It’s about nurturing customer relationships, optimising internal operations, and fostering continuous learning and innovation. Essentially, it offers a multi-dimensional but holistic view of your business, ensuring no critical aspect is overlooked.

Why SMEs thrive with the Balanced Scorecard

For SMEs, the Balanced Scorecard is a transformative tool. It delivers a balanced perspective on business performance, ensuring that you’re not solely focused on financial gains. This methodology encourages building a business that excels in customer service, operates with internal efficiency, and constantly evolves.

By monitoring these diverse areas, SMEs gain a comprehensive dashboard that aligns day-to-day operations with long-term strategic goals. An alignment which is crucial for sustainable growth and success.

Implementing the Balanced Scorecard in your SME

To use this method in your business and improve your performance, start by creating your own scorecard. Think of this as a single report that outlines your plan, goals, and priorities to your employees and anyone who needs it.

1. Assess your current position, by performing an in-depth analysis of your internal processes and external factors. (Look at your mission, your values, your client base, the market etc).
2. Identify your strategic objectives, which are qualitative, long-term improvement goals (outcomes) critical to strategy success.
3. Map your strategy, by taking your strategic objectives and creating a visual narrative of how the organisation will achieve the objectives it sets out to achieve.
4. Identify your KPIs, which will help you to manage strategy execution and monitor the effectiveness of your plan. Just remember to choose metrics that accurately reflect each of the four essential areas.
5. Choose your strategic initiatives, which are the tasks that are most critical to your strategy’s success. These need to be prioritised and implemented as they are essential in closing performance gaps.
6. Analyse your performance, to identify what is working well and what isn’t. This will help you implement the most impactful changes.
7. Get buy-in, which is essential for successful implementation. You will need everyone to support your vision, so you need to make sure that you have the right behaviours and alignment from the top down.
8. Assess, review, and improve. Regularly review your plan against actual performance, so that continuous improvement becomes a part of day-to-day operations.

Your balanced scorecard will act as your roadmap, guiding your business not just to perform well today but to excel tomorrow. By adopting this approach and focusing on the right KPIs, you can steer your SME towards a future of balanced and sustained success.

Setting and measuring effective KPIs for small businesses

Here are some guidelines for defining essential key performance indicators:

Alignment with Objectives: Your KPIs need to be in sync with your organisation’s big dreams and strategies. It’s like making sure all the cogs in your business machine are moving in the same direction towards those long-term goals.
Quantifiability: If you can’t measure it, you can’t manage it. Every KPI should be something you can track, whether it’s through numbers, percentages, or clear criteria. It’s about turning those abstract goals into something tangible.
Actionability: The best KPIs are those that don’t just sit on a spreadsheet looking pretty. They should be the kind that nudge you towards making smart decisions and taking real action.
Relevance: Stick to KPIs that matter to the specific areas of your business. There’s no point tracking something that doesn’t align with what a particular department is all about.
Accountability: KPIs are critical; there is no room for any ‘passing the buck’ or for an underperforming KPI to ‘slip through the cracks’. Every KPI should have an owner, and all team members should be clear on who that is.
Time-Bound Targets: Set deadlines for your KPIs. It’s like setting a finish line for a race – it gives everyone something to aim for and keeps the momentum going.

Examples of essential key performance indicators for small businesses

Sales Growth: Tracked through monthly sales reports, with specific targets set for percentage growth over a period.
Customer Satisfaction: Measured via surveys and feedback forms, aiming for a specific satisfaction score.
Employee Turnover Rate: Critical for SMEs where team cohesion is key. Monitoring turnover and setting reduction targets is essential.
Operational Efficiency: Measured by the time and resources used for tasks, with targets set to reduce these, thereby improving efficiency.
Website Traffic: For SMEs with a digital presence, tracking visitors and engagement on their website is crucial.
Production Defect Rate: If you compete on the quality of your product, you need to ensure every item is suitably checked and minimal (zero!) defects reach the customer.
Lead Conversion Rate: This measures the percentage of leads converting into customers, with targets to improve this rate through various marketing strategies.
Social Media Engagement: Monitors interactions on social media platforms, with goals for increased followers or engagement rates.

Overall, remember there are 1000s of KPIs that could be measured, but only a handful will be the right ones for your business right now…

The importance of setting targets and understanding measurement

Setting targets for KPIs is crucial as it establishes a clear benchmark for success. However, it’s important to remember that your goals should be both realistic and challenging so that you´re driving your organisation towards continuous improvement.

Understanding how to measure these targets involves:

Utilising the Right Tools: Arm yourself with the right software or tools that can keep an eye on these KPIs for you. It’s like having a personal assistant for your data.
Regular Reviews and Adjustments: Keep coming back to your KPIs. Are they still relevant? Do they need a tweak here and there? It’s all about staying up-to-date and on the ball.

By effectively setting and measuring KPIs, small businesses can gain invaluable insights into their operations, make informed decisions, and steer their business towards greater success.

How to spot and fix gaps in KPI measurement

Identifying KPIs is one thing, but realising where you’re not gathering enough data? That’s where the real challenge lies.

Strategies for SMEs to bridge these gaps

If you’ve found some gaps in your KPI tracking (or you wish to avoid them if you identify some in the future), here are a few tips to bridge them:

Review Your Current KPIs: Sometimes, you need to take a step back and look at what you’re already tracking. Ask yourself, “Are these KPIs giving me the full picture?”
Talk to Your Team: Often, the best insights come from your people. They might have a front-row seat to the data gaps you’re trying to fill.
Embrace Technology: There are loads of tools out there that can help you collect and analyse data. Don’t shy away from using tech to get a better grasp on your KPIs.
Set Clear Goals: Know what you’re trying to achieve by filling these gaps. More informed decisions? Better customer understanding? Clear goals can guide your strategy.
Assign Ownership: Put certain key team members in charge of specific KPIs. When someone knows they’re responsible for a specific metric, they’re more likely to give it the attention and care it deserves.
Keep Your Team Accountable: It’s not just about setting goals but also about actively working towards them, so keep your team accountable for their KPIs. Accountability means regular check-ins, updates, and adjustments – anything to help keep them invested and productive.
Seek Professional Help: If you can’t figure out why things aren’t matching up or you just want expert advice, many financial professionals can help you create a solid strategy while bridging all the gaps between your goals and your performance.

Wield the power of KPIs

When you’ve got a comprehensive view of your business through well-tracked KPIs, it’s like having a superpower in decision-making. You’re no longer guessing or going by gut feelings. Instead, you’re making decisions based on solid, reliable data.

For SMEs, this can be a game-changer. It means you can pivot quickly when needed, spot opportunities faster, and avoid potential pitfalls. In short, thorough KPI tracking helps you steer your business with confidence and clarity.

Achieve what you set out to

If you found the above insights valuable but still feel daunted by taking on this yourself, then please get in touch to see how we can help you.

When you choose Mettryx as your partner, you gain access to over forty years of combined experience in delivering financial analysis for businesses like yours. We specialise in simplifying the translation of data into insight, providing you with accurate and insightful financial guidance.