What is a KPI and how do I use it?

12th May, 2017

What are these KPIs that everyone talks about?

In business, KPI stands for Key Performance Indicator. We use these indicators to measure performance and improve our business.

If I could compare them to something like a road trip, I would say that KPIs are similar to the directions given by a GPS.

Just as the GPS guides you to a destination, KPIs guide you to your business destination, which is profit!

These indicators may include figures such as sales, average transaction value, and labour costs, but the KPIs for your situation may vary.

KPIs are the easiest way to monitor your businesses performance.

Remember the old saying, “If you can measure it, you can improve it”? Never is this more relevant than when talking KPIs and business. Once you have set your KPIs, you can improve them.

KPIs are nothing to be scared of — I’ve had employees as young as 15 understand and monitor them.

KPIs simply allow you to leave your business and ensure it is being run profitably in your absence. They give you a target that you can share with your leadership team so that they can help you to run your business profitably.

So how do you come up with these KPIs?

If you’re in the beginning of your business journey, you will be able to find KPIs for your type of business on the ATO website.

This website has benchmarks for every industry you can think of, but remember: these are average benchmarks. You want to set KPIs that are better.

For example, if the average turnover of your type of business is $500k – $750k, you want to set your benchmark at the $700k.

To create your own KPIs, I recommend you start with the following in percentage of sales format:

  • Cost of Goods Sold (COGS)
  • Labour costs

Start with the following in dollar format:

If you’ve been operating for six months or more, you do not have to rely on the ATO website; you can get your actual operating KPIs.

All you need to do is look at your daily “z” reports from your Point of Sale (POS) system and possibly your monthly Profit and Loss (P&L) statement.

Print the Profit and Loss report with two columns: the first in dollars and the second in percentage of sales. These percentage figures are your actual KPIs.

Whether good or bad does not matter; what matters is that these are the KPIs you have already been achieving.

These KPIs will become the starting point from which to improve your business.

I have KPIs…now what?

Now that you have your first set of KPIs, you can go about improving them.

If you can increase your sales by 1 percent and decrease both your labour KPI and your COGS KPI by just 1 percent each, then your bottom line profit will increase by up to 25 percent.

Who does not want an extra 25 percent to put in their bank account?

Just imagine what would happen if you were able to improve these KPIs by 5 percent or more!

The secret to success in using KPIs to improve your business is to share them with your team as a target for either the day or the week.

It’s important to remember that your KPIs can be changed at any time.

Set them on the less challenging side to start with until your team improve their management skills; then just keep shifting the target to challenge your team more and more.

But be careful — setting a KPI that is a huge challenge for your team to meet can create problems.

You want to improve your business, not to get your team in a mindset of constant failure, which can happen if they are constantly missing the KPI targets you have set.

Make sure your KPIs are achievable because your team becomes excited and engaged as they meet them.

Each time you meet a KPI, you are achieving your goal and building your profit.

Setting a KPI also lends itself to team building.

Setting the KPI as a team and getting everyone on board to meet it creates electricity within your business, an energy that relates all the way to the customer.