Change takes courage. Wanting better results for yourself, your organization or your business is only an idea. Improving results requires more than effort. First you have to pinpoint what better results are. Then you have to identify how to improve your activities. Which requires improving your behavior. Fundamentally this requires you to improve your beliefs. Are you ready for this?
Which Key Performance Indicators are Right for You?
Descriptive? Diagnostic? Predictive? Prescriptive? Yes, here’s a strategy to select and test a relevant business analytics strategy using each and every relevant Key Performance Indicator (KPI) for your company. But what are they exactly? Which Key Performance Indicators are right for you?
A Key Performance Indicator is a measurable value that shows the progress of a company’s business goals. KPIs indicate whether an organization has attained its goals in a specific time frame.
While financial analytics are applicable to every organization, relevant KPIs vary by industry. In every line of business there is some sort of metric that someone uses to gauge how they’re performing and whether to judge success or failure.
There are many reasons to implement a KPI reporting strategy in every business. Even if today isn’t the day to start a sell-side M&A process, a buy-side M&A process or revamp your investor relations program, today is the day to improve your organizational productivity and profitability by leveraging the power of KPIs.
You can start to reach your full potential with an Alignment Map.
The metrics that you measure and track depend completely on your organization’s goals and objectives. First ask yourself what it is that you want to achieve. Next, consider how you can measure the progress towards your goals.
A Key Performance Indicator is the number that shows whether you’re getting closer to your goal or if you’re not making adequate progress.
There are two broad categories of KPIs:
While there are many metrics that are important to track, only some are KPIs, which may be in the form of either (i) a Number or (ii) a Ratio.
A metric is a KPI if it meets the following criteria:
- Available and measurable
- Highly impacts its corresponding goal
- Relevant to its corresponding goal
- Instantly useful
- Available in a timely manner
The most useful KPIs provide a high amount of insight and have short-term impact.
Whichever KPIs are decided upon your organization must reflect your goals, be vital to your organization’s success and be quantifiable and measurable.
Ratio analysis serves two main purposes
- Track company performance: Determining individual ratios per period and tracking the change in their values over time is done to spot trends that may be developing in the company.
- Make comparative judgments: Comparing financial ratios with those of major competitors is done to identify whether the company is performing better or worse than industry averages.
Why Key Performance Indicators?
KPIs provide valuable insights to every business. They enable us to measure product/market fit, finance/market fit and organization/market fit. Just looking at the past, at what happened, isn’t enough to grow a business. We need the three other categories of KPIs even more to stay relevant.
Remember change is the only constant and staying relevant requires change. Maintaining future focus should be every company’s top priority.
Users of financial ratios include parties internal and external to the company:
- Internal users: Management team, employees and owners
- External users: Financial analysts, creditors, equity investors, competitors, tax authorities, regulatory authorities and industry observers
Strategic KPI definition process:
- Articulate the objective
- Define the measure(s) of success
- Identify diagnostic metrics
- Gain stakeholder buy-in
- Finalize data sourcing requirements (business, technical and procedural)
Conclusion: Measurement is the reduction of uncertainty about a quantity through observation. In order to understand something you need to measure it. Uncertainty is a major hurdle in mergers & acquisitions. Good use of KPIs in a sell-side M&A process adds value.
Sell-Side M&A and KPIs
In mergers and acquisitions value is based largely on the future.
KPIs belong in your Confidential Information Memorandum (CIM) when running a sell-side M&A process. Remember the role your CIM plays in business valuation (from Sell-Side M&A Strategy: 5 Tactics to Maximize Value)? KPIs will support your financial projections if presented effectively.
When your financial projections posit future revenue growth, you need to provide supporting data to get credit. This is where relevant KPIs can provide viability in the eyes of buyers. Shouldn’t you already be holding your organization accountable this way? Nothing speaks like relevant data.
The more data you can provide to support your financial statements (past, present and future) the more credibility you will build.
Buy-Side M&A and KPIs
If you changed your view on the M&A landscape and became acquisitive, would you want the information I just described? For precisely the same reasons?
My three favorite words when it comes to buying: if you believe.
Relevant KPIs are the only way you can make an informed decision about what to believe when evaluating an acquisition target. Therefore, it goes the same if you are an investor.
Investor Relations Tips and KPIs
When you sell any part of your company to one or more investors, you are selling yourself and a story. Your idea takes place in the future. The investors are betting on you; they are believing in you.
Every executive wants to see the most relevant KPIs on a regular reporting basis because when major changes happen you need to be able to explain what happened, what it means and what you are going to improve.
Report what happened. Answers the question: Can we do better? By what measure? How?
Descriptive Key Performance Indicators tend to be numbers, they measure results.
- Lead count
- Lead conversion rate
- Customer acquisition cost (organic vs. paid)
- Customer count
- Recurring Revenue (monthly and annual)
- Customer concentration
- Month over month growth rate
- Production volume
- Planned vs. actual hours of work
- Production downtime
- Overdue project tasks / crossed deadlines
- % of overdue project tasks
- Defect density
- Return rate
- Missed milestones
- Number of budget iterations
- Cost of managing processes
- Return on investment (ROI)
Report why descriptive KPIs happened. Answer the question: What factors caused positive and negative performance?
Diagnostic KPIs indicate the health of your business relative to specific variable factors. Diagnostic KPIs tend to be ratios that compare a descriptive result to a relevant variable.
will look at the quality of your campaign’s engagement and may include metrics such as cost-per, conversion rate, engagement rate, website bounces or viewability rate.
- Source of leads/prospects
- Monthly new leads/prospects
- Lead to Opportunity ratio
- Customer life time value
- Up-sell/Cross-sell rate
- Sales by campaign
- Top content categories
- Top posts/articles by reader
- Average clicks per post
- New vs. lost followers
- Content production time
- Cost variance (CV) (planned budget vs. actual budget)
- Annual Recurring Revenue (ARR) per Customer
- Projects completed on time (%)
- Cancelled projects (%)
- Projects on budget (%)
- Absenteeism rate
- Employee productivity
- Cost per hire
- Turnover rate
Report what could happen. Answers the question: Will we do better?
- Qualified leads per month
- Marketing qualified leads (MQL)
- Sales-accepted leads (SAL)
- Sales qualified leads (SQL)
- Cost per lead generated
- Net promoter score
- Cost per conversion
- Cost per conversion by channel
- Average time of conversion
- Retention rate
- Attrition rate
- Monthly website traffic
- Traffic from organic search
- Returning vs. new visitors
- Visits per channel
- Average time on page
- Click-through rate on web pages
- Pages per visit
- Conversion rate for call-to-action content
Report what should happen. Answers the question: Where is the opportunity?
- Inbound links to website
- Traffic from organic search
- New leads from organic search
- New leads from organic search
- Number of unique keywords that drive traffic
- Keywords in top 10 SERP
- Rank increase of target keywords
- Conversion rate per keyword
- Page authority
- Google PageRank
- Volume of traffic from video content
- Leads & conversions from paid advertising
- Number of monthly PPC campaigns
- Cost per acquisition (CPA) & cost per conversion (CPC)
- Click-through rate on PPC advertising
- Traffic from social media
- Number of leads from social media
- Number of conversions from social media
- Conversion rate for social media leads
- Managed audience size
- Engagement rate
- Social media mentions
- Social media ROI
- ROI per content type
- Web traffic from PR campaigns
- Number of clippings
- Calls from PR campaigns
- Media impressions from PR campaigns
- PR ROI
If you are interested in learning more about the value of Key Performance Indicators and how to design and implement a relevant strategy for your business, corporate finance consulting is an easy way to start.