Business New Year Series Part 2: How to Set KPIs to Reach Your Business Goals
In part one of our Business New Year Series, we discussed how to plan your business goals to reach success. If you haven’t already planned your goals, check out that article first. If you’ve got a solid idea of your business goals, read on to discover how to set KPIs to ensure you reach those goals.
With your business goals set, it’s crucial to put key performance indicators (KPIs) in place to help you achieve (and exceed!) those goals. These KPIs should be expressed as targets that you need to regularly hit along the way. Having a defined target helps to keep people focussed, accountable and on track.
KPI targets are a business performance management tool. Without them, there’s no clear-cut way to measure whether you’re tracking in the right direction. Careful planning might get you to your goals, but if you’re not measuring your progress and outcomes, how would you even know? Defining KPIs and aligning them with your business goals ensures that you can keep your finger on the pulse the whole time to celebrate your wins as they happen and make adjustments to your direction as required.
Here are our top tips for developing KPI targets. They will help you measure your progress towards achieving each of your business goals.
Tip 1: Break your goals down into smaller KPI targets
This is relatively easy to do for financial goals. The goal can be broken down into smaller timeframes and relevant KPI targets. Performance can then be measured by comparing current financial figures with those of the same period in the previous year or years, as shown in the example below.
Example Goal 1:
- Increase sales by $120,000 in 2023.
KPI Targets:
- Increase first quarter year-on-year sales by $15,000.
- Increase second quarter year-on-year sales by $25,000.
- Increase third quarter year-on-year sales by $35,000.
- Increase fourth quarter year-on-year sales by $45,000.
Process:
- Invest in marketing (the marketing campaigns will then have their own KPIs regarding performance).
- Assess staff sales skills and provide training to improve customer service.
- Assign sales targets to employees (these will be their personal KPI’s).
Aligning KPIs with your goal gives a clear indication of what needs to be achieved to meet the goal. Once you’ve set your KPI targets, it’s important to develop processes regarding how the KPIs will be reached. For this example, allocating sales targets to your employees might be the starting point. Ensuring their sales skills are adequate is also an essential step. Improving their sales skills might be the next step.
Using a reward system can help to motivate employees to meet their personal KPIs. However, keep in mind that investing in your employees’ education and human capital can help get great results too. Rather than simply motivating them to get better results through incentives and rewards, you’re enabling them with the skills to achieve higher results.
Example Goal 2:
- Double business profit within five years
KPI Targets:
- Invest in new equipment to expand production capacity and profit by 14.87% by the end of 2023.
- Increase profit by 14.87% by the end of 2023, 2024, 2025 and 2026 compared to 2021.
|
Increasing profit by the same rate each year |
End of Year Profit |
|
2022 Profit |
$1,000,000 |
|
2023 Profit = 2022 profit x (1 + 14.87%) |
$1,148,700 |
|
2024 Profit = 2023 profit x (1 + 14.87%) |
$1,319,511 |
|
2025 Profit = 2024 profit x (1 + 14.87%) |
$1,515,723 |
|
2026 Profit = 2025 profit x (1 + 14.87%) |
$1,741,111 |
|
2027 Profit = 2026 profit x (1 + 14.87%) |
$2,000,000 |
To calculate the growth rate needed to double your profit over a certain amount of periods (for example, years) a simple formula to use is the rule of 72.
Rule of 72: Years to double profit = 72 / growth rate
To find the growth rate to reach your desired years to double profit, simply rearrange the formula:
growth rate = 72 / Years to double profit (in our example it was 14.87% = 72 / 5
Note: we calculated the growth rate of 14.87% using a more complex formula than the rule of 72. The rule of 72 actually gives us a growth rate of 14.4% for our example.
Process:
- Organise finance for new equipment.
- Invest in marketing or business relationships to generate more sales.
- Designate a personal sales target for each salesperson.
- Provide ongoing training to the salespeople to ensure they have the skills to reach their targets.
As you can see, this KPI target-setting strategy requires you to work backwards. You start with your overall goal and break it down into smaller measurable KPI’s. You then finetune your processes, so your business is operating in a way that makes reaching the KPI’s achievable. Measurement along the way is crucial — if you’re not reaching your KPI’s, you have the opportunity to reassess and change direction.
It’s a little more difficult to set KPI targets for goals that aren’t measured financially. However, as long as a goal can be measured somehow, a relevant KPI target can still be set, as the table below shows.
|
Goals |
KPI targets |
Process |
|
Achieve a staff retention level of 90% during 2023. |
Staff turnover to be less than 5 per quarter during 2023. |
Improve the work culture and boost morale by offering incentives. Perform staff reviews more frequently to open up lines of communication about their experience working for you. |
|
Reduce the number of faulty products manufactured by 10% during 2023. |
Customer refunds for faulty products to reduce to a maximum of 20 items per quarter during 2023. |
Assign someone to perform more stringent quality assurance. |
|
Ensure 95% of customer deliveries are made on time during 2023. |
No more than ten customer deliveries per month to be late during 2023. |
Assess your supply chain and make changes to help manage supply chain and delay risks. |
Tip 2: Make sure all of your KPI targets are linked and consistent
A good way to do this is to ensure that you have KPI targets expressed in terms of both staff and customer behaviours that will lead you to achieving your business goals. Both groups are essential drivers of business performance.
For example, achieving higher staff retention levels can:
- Result in better client relationships being developed (increasing sales).
- Lower recruitment and training costs (increasing business profitability).
Similarly, sales and profits can also be increased by achieving KPI targets such as:
- reducing the number of faulty products manufactured, and
- ensuring that customer deliveries are made on time (as this boosts customer satisfaction and, therefore, the likelihood of both repeat business and referrals).
Tip 3: Ensure you have the funds you need
There’s no point having KPI targets in place if you don’t have the funds to implement strategies to achieve your business goals.
For example, if you need to invest in new equipment to boost your sales and your profits, you need to have the working capital available to do it. If you don’t, you need to be able to source those funds — for example, by arranging business finance on the best possible terms.
With your business goals defined and your KPI’s set, You’re well underway towards business success. However, the goals and KPI’s don’t reach themselves! Active management is required. Don’t miss part three of our Business New Series, where we discuss monitoring and managing your business performance to reach your goals.
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