Episode 34 Does your financial plan make sense? How to use KPIs to be sure

Key performance indicators of KPIs are an excellent tool for assessing your financial plan and for tracking your business’s performance. Some KPIs are common to most businesses, some will be more focused on your industry and some maybe specific to your business.

These are the crucial metrics for your business. Potential investors will be interested to understand how you will measure progress. KPIs also help your employees know what is critical for your business. ​ KPIs fall into two types – Leading KPIs that will tell what is going to happen and lagging KPIs that tell you what has happened. Both have there uses. Sales per salesperson is a lagging KPI. It can only be calculated after a sale has taken place. Initial customer contacts per salesperson is a leading KPI. More contacts now will, hopefully, lead to more sales in the future Investors will expect to see at least the most common KPIs. Revenue growth rate Gross Margin Profit – Earnings, EBIT, EBITDA Cash flow – burn rate per month, Runway remaining etc. Consider what is important for your business. Failure to track and understand the performance indicators can lead to business closure LayerVault provided a version control service to developers. It was very popular with its users but failed to gain enough traction to attract future investors and ran out of funds. CEO Kelly Sutton said “I think one of our biggest mistakes as not checking our KPIs regularly enough. They would have greatly helped us identify problem points in our business. Although KPIs will be different for each business some can really help you understand your business value proposition. Customer conversion rate. The number of customers who sign up or buy your product divided by the number of customers who have expressed an interest. If this number is low, potential customers are not seeing the value in your product or service versus the cost. Re-evaluate your pricing model or your offering design. Customer Retention Rate or Churn Rate. These are opposite sides of the same coin. Customer retention rate is the percentage of customers who remain with you. It is often looked at over a year or more. How many customers who bought from you last year are still buying from you this year? Churn rate is the number of customers lost in a given period. Which is appropriate for you depends on your industry. If you are a B2B business retention rate may be more the most useful. Churn rate is maybe more relevant to B2C or SaaS companies. High retention or low churn rate indicates that your current customers are happy and believe you are solving their problems and are delivering value. Low retention or high churn could mean that your pricing is too high for the value offered, or there is something missing from your product offering that your customers need. Length of your sales cycle. This is the time taken from initial contact with a potential customer to making that first sale. This KPI can help in several ways. If you measure it by sales person you can identify who closes the deal most rapidly. This is a learning opportunity to teach others on what to do and what not to do. If you track the sales cycle through its stages you can learn where the roadblocks are in your selling process If the sales cycle is increasing overtime it could mean you have exhausted the customers who are early adopters and your ideal fit and are now having to attract less enthusiastic customers. Your Customer Acquisition Cost (CAC) may be increasing. There are many other KPIs that could be relevant to your start up. If number of users is important to your business, you will need to consider Daily Active Users or Monthly Active Users as a metric. Identify the KPIs that are most important to you. Use them to confirm your financial plan makes sense.