Focusing on the Right Metrics

Feb 25

Your clients might be generating solid or even great revenue, but that does not mean they are generating healthy or sustainable profits, providing the best customer service or creating a healthy environment for their employees. Focusing on their KPIs and metrics can help ensure they are making progress in the right direction on all fronts.

That said, it can be difficult to know which metrics to focus on when trying to measure the success of any business. There are so many KPIs and metrics out there, it's hard to keep track of them all and figure out what they mean for your clients - and which ones fit best to which clients.

You can start by using this post as a guide to understand how different metrics work together, why and when they matter and how to use them to help your clients make better decisions about how to allocate resources and time.

What are KPIs and metrics and why do they matter

In the simplest definition, KPIs (Key Performance Indicators) and metrics are important tools for measuring the success of a business. They can help you figure out where your client is making progress and where they need to improve. That said, there are almost an endless number of KPIs and metrics that you CAN focus on. Discernment about which ones will help you monitor your client’s business health is critical. It isn’t about finding data - it’s about finding the RIGHT data and helping your clients apply it to make better decisions with the most impact.

The different types of metrics and how they work together

It's important to understand how different metrics work together to provided the most holistic view of your client’s business. For example, you might track customer acquisition costs and customer lifetime value to get a better understanding of how much it costs to acquire a new customer and how much revenue they generate over time. These two metrics can work really well together for any business that has high acquisition costs (e.g., those that need to do alot of advertising) and also repeat customers. That’s usually a B2C company. These metrics may not work well at all for a B2B business or one that does non-repeating projects.

Here are a few examples to consider for your clients:

Revenue and profit measures: Gross revenue, gross profit and net profit are all key line items. Reviewing them in total and as percentages - especially over time - can be very telling even without looking at any other metrics. These metrics can help you figure out how efficiently and effectively a company is generating revenue at a high level - and whether it is improving or declining.

Productivity and efficiency measures: The more efficiently a company can produce revenue, the greater chance they have to create and sustain profit. The more ineffective companies are at generating revenue, delivering the products or services sold and conducting back-office operations, the less likely profits will be generated or sustained. Most companies can outwork inefficiencies in the short-term by hiring more people or paying overtime. Productivity and efficiency measures beyond gross/net profit margins include:

Direct costs (labor, materials, products) as a % of revenue.
Overtime as a % of total labor.
Revenue per employee (using all employees not just direct labor).
Output (widgets, products) per hour and/or per direct employee.
Volume shipped by day or by week.
Error rates based on returns, rework and/or quality control reviews.

Customer value metrics: Customer acquisition and customer lifetime value can be critical to any business. Customer acquisition costs include marketing, advertising and sales expense - all of the costs associated with getting a customer to buy the first thing. Customer lifetime value is how much that customer spends from the first purchase through all the following ones. The more repeat customers you have, the higher profit should be after customer acquisition. The goal is to make sure, on average, the acquisition costs don’t exceed the lifetime value. If it costs a company more to acquire a customer than they make from that customer, that is a recipe for business failure over the long-term. (NOTE: This is especially a big deal to any companies who rely on paid social media or Internet traffic as a primary source of customers.)

Cash generation measures: Profit is the first step in calculating cash generated or used. Traditional cash flow statements can be used to do a full-blown review, but you can also use a more streamlined approach depending on the business. If the business serves only direct consumers that pay at the time of purchase, you can use the income statement and then factor in debt payments, owner distributions/dividends and fixed asset investments. If your client has AR, AP, inventory, debt, heavy fixed assets, doing a full cash flow statement will actually be faster and easier than trying to chase all the components around. The goal is to determine - over time - if the company is a net generator or a net user of cash.

Figuring out which metrics matter most to the business

Once you understand how different metrics work together, you can determine which ones matter most to your clients. Some will apply to all of them; other won’t. Additionally, most valuable metrics to any client can change over time. Since many metrics can provide valuable insights, it's important that you help your clients focus on the ones that have the biggest impact to their financial and operational goals.

In our view, it is best to focus on 3-5 key measures at one time. More than that can be too much data that leads to analysis paralysis instead of informed action. Plus, the risk that there are conflicting messages goes up. There is such a thing as "healthy metric competition" but that is a more advanced topic, and we recommend avoiding that in the initial stages of metric setting and monitoring. You want to empower your clients not overwhelm them. To sum up….

Financial metrics are a great way to track the overall financial performance of a company.
Customer value metrics can help determine whether gaining customers is costing you more than the revenue generated.
Operational productivity metrics can help track the efficiency and effectiveness of a company’s operations.
Cash generation measures can help assess the financial strength and sustainability of a company.

Next Steps

Since there are an almost endless number of KPIs and metrics that you can focus on to monitor your business health, the first step is to take a look at either your client’s business goals OR their most pressing issue. That’s where they need the most concise and reliable information for decision-making and it is likely where their energy is already focused. Using metrics and other key measures to support and facilitate those efforts is a win-win.

If you don’t know your clients business goals or most pressing issue, now’s the time to find out!

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