OK, contractors, how do you measure the health of your business and whether your on track to meet your goals or in danger of closing down the doors? How do you know whether your business is making money in 2014 (you don’t want to wait until April 15, 2015 to figure that out!!)?
KPI is short for Key Performance Indicator, something you’ve determined is critical to track and evaluate to determine whether your business overall, a department, or even an individual is on track according to your plan (you should have a annual plan you’re trying to meet).
When I’m on a 50-mile canyoneering trip, I’ve got things like current location, daily progress, the amount of food remaining, whether there’s a thunderstorm rolling in that is going to prevent me from moving down a narrow slot. These are the metrics (and many people use terms like “business metrics” or “key ratios” instead of “KPIs”) that I’d use to know whether I was on track, and what I needed to do or adjust to make it back out alive.
And you need the same things in your business. How many leads do you need this week to ensure that you have enough work for your crews next month? Or next week!? What rates does each member of your sales team need to be closing at for your business to work—and are they delivering them? Are your margins sufficient to cover your overhead and leave you a bit of profit at the end of the day? Speaking of margins, how much did you make on that project for the Romeros? Do you have enough cash to pay your vendors and make payroll on Friday?
Depending on the answers to the key questions, what are your priority areas to keep the company on track?
Now, you could look thousands of different points. But that is expensive, distracting, and ultimately counterproductive. The “Key” is key! You want to focus on those items there are critical to success. Some let you know you’re well on the way there—like gross margin and the bottom line. Others are early warning indicators like leads, and weekly sales figures.
Your mileage may vary, but here are several things I recommend looking at on a regular basis:
- Leads. (If the phone doesn’t ring, nothing else happens!)
- Leads generated by my employees—and by referrals from previous customers.
- Cost/lead. This is an early indicator.
- Sales/lead. (both # and $) This helps me judge cost effectiveness.
- Gross sales for the company.
- Gross sales by individual.
- Sales by service technician.
- Close rates.
- Average ticket sizes.
- Weekly production levels (which feed into monthly and YTD revenue).
- Backlog, which helps me understand how much I’ll be producing next week and the week after, and helps me decide whether to ramp up.
- Gross margins, overall, by department, by sales person, and by project so I can find what’s working and replicate it and find problems because I replicate them too many times!
- Test-out results (satisfactory or not!).
- Customer satisfaction scores.
- Outstanding receivables.
- Outstanding payable.
- Cash and cash flow projections. (and by lead source if I’m feeling a bit frisky).
- Net profit, at least on a monthly basis.
There are another bakers dozen that are important, including some very important financial solvency ratios. And some indicators get added to the list or taken off the list, at least in terms of the frequency I’ll look at them depending on evolving priorities or troubleshooting. Most have a strong quantitative relationship to my annual plan. A few are more qualitative indicators that all is well.
And the benchmarks you should target? That is a great question–and the answers are important. They’re also challenging to pin down, especially in an emerging industry like home performance without a lot of publicly shared data. The ranges below may be in the ballpark for you, but the right numbers vary widely depending on the specific business your running along with a host of other factors. A great way to determine these ranges is to compare notes with other businesses that look like your business, or perhaps more importantly the business you want to have over the next couple of years.
Whether you use the term “KPI” or not, what are the critical elements you look at on a daily, weekly, or monthly basis? Why are they important? And what do you think the right benchmarks should be?