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Do you know that KPIs are the secret weapon really successful companies use to grow their businesses from zero to a hundred million? That is right. In today’s video I’ll go over what a KPI is, what makes a good KPI, and some great examples of different KPIs from several industries.
Hey everybody. Welcome to Scaling to Seven Figures and Beyond. I am your host, Leo Landaverde. I’m a business coach, outsource CFO and author and I’m on a mission to help small business owners with scale to seven figures and beyond maximizing profit, maximizing value. Let’s get to it.
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All right, number one. Are you ready? All right, KPI, what does it stand for? In short, KPI stands for key performance indicator. It is a clearly defined outcome-based measurement tool that you use for the business and the operative word here is key. Not every indicator in your business should be measured because the truth is you can’t measure everything. Who has the time for that? So you have to choose for yourself and for your business what things that you want to measure matters.
I love what Ronald Reagan used to say, that “You got to inspect what you expect.” Well, this is where the key performance indicators come into place, along with a budget and a cash flow statement. Those are powerful tools. At the heart, KPIs are a way for you to measure as you progress towards your goals. So if you have goals, they get translated into actionable indicators that you can put and measure against them.
Okay, so number two, what makes a good KPI? Here’s the thing you need to remember. A KPI is only good if it inspires you to action. So for that, we need to ask ourselves a few questions. What is the objective? Does the objective matter? Why does it matter? Is it measurable? Will it inspire you to action? And what is the appropriate timeframe? The truth is if you can’t measure it, then the objective is not specific enough. It must be specific enough.
All right, everybody. So I’m going to try to illustrate this with an example here. So please forgive my drawings. I’m not the best at that, but you’ll get the point. So I use the car analogy because I imagine that most of us drive a car. So here’s you in the car. There you are right there in the car. So you’re driving, right? Your car breaks down, right? So you have to take it to the mechanic. You take your car to the mechanic because something is wrong. The mechanic connects your onboard computer to a machine that they have, another computer, that has a set of optimal indicators. Those are your KPIs for the car. Your car has key performance indicators that are wired as optimal from the manufacturer into their computer.
You don’t know what those are, right? But the manufacturer does. So the manufacturer has a computer that is at the mechanic shop. They connect your onboard computer to their computer, and it’ll spit out a report that will tell you, “Hey, this is what optimal ranges should be for all your key performance indicator for your car. And this is what yours are. And this is the variance. This is the difference.” And you’ll know, but first the mechanic will know what’s going on and what they need to fix. Do they need to fix everything? Probably not. There are just a few lights or a few switches that will go off and that’ll tell him this is what you need to do. It makes the job very simple because everything is wired through the key performance indicators.
Lesson number one for you is you must know what those key performance indicators are for your business. We’ll talk about those in point number three. But for now, let’s go back to it. Here you are driving down the freeway and think about it this way. When was the last time you actually thought about what your dashboard is doing while you’re driving? Because the truth is, if you’re like me, you’re driving. You’re not thinking about the actual driving. You’re not looking at your dashboard. You’re looking at how fast you’re going, whether the lights are on or anything is blinking. Every once in a while you’ll spot how fast you’re going, right? Whether you’re going 70 miles an hour or not. How much gas you have. And if you have a navigator, a navigating system in your car, you’ll also know how far from where you’re going, how far left, how much time is left.
So those things are important. So here’s what the dashboard helps you in your car. It’ll tell you, it’ll help you to know how fast you’re going, how long before you get there, how soon will you need gas, and is everything is okay in the car. Because if it is not, then your dashboard becomes really, really important. It’ll tell you that there’s something wrong. A light will go off and it’ll say, “Check engine light.” If that goes on, if I were you, I wouldn’t ignore it. As soon as possible, you will have to get that to the mechanic, which then will they connect it to the onboard computer.
So for your business, let’s use that analogy. The onboard computers are the predetermined key performance indicator you have set up for your business, that that’s the backend of your business. Those are the formulas. Those are the things, it could be the gross profit, it could be the work in progress, it could be the staffing ratios. Whatever matters to you is pre-wired some place. And the front end is what creates a dashboard. I love creating dashboards for my clients that will basically tell them all of those things that they need to be looking at every month connected to their financial statements. So they can look to see how fast they’re going, how soon before they run out of cash, AKA cash in my business. And you remember, you got to measure what matters, because not everything matters in your business. Hope that helps.
Number three, KPI examples. As I promise you at the beginning of the video that I was going to go over some examples. So here we are with four different industry verticals that I work with. Number one construction. Here are the KPIs that we measure in construction. Current ratio, burn rate for cash, your cashflow margin, your days payable outstanding, your day sales outstanding, your work in progress. This is a big one. Most construction companies are not keeping up with the work in progress, which offsets the net margin and the gross margin particularly. So there’s net margin and I forgot to mention gross margin.
Number two, restaurants. Restaurants are notorious for being low margin. So you really got to keep an eye on your costs, which are your cost of goods sold. The number one cost of goods sold is your food costs, right? Which should be no more than 27 and a half percent. And then you get your employee turnover. You got your average ticket. So you want to know, I mean if you really want to run some quick calculations is how many tickets you sold for the month times the average ticket is going to give you a revenue for the month. Your web. A lot of restaurants are now selling through their web. Uber Eats and the like. Well, what percentage of the orders are web orders? Sales per employee per hour. That’s another key performance indicator for restaurants.
Notice that some of them are common across multiple industries. Some are not. Like your gross profit, your net profit and your revenue year over year pretty much apply to any industry but not all.
So professional services. I deal a lot with professional service companies like accounting firms, law firms, engineering firms. Any white collar, high ticket services are considered professional services. You got your staff utilization rate, your revenue per employee. It’s big because it is a highly compensated individual. So you want to know how much revenue they’re generating, and that includes my industry. So profit per employee. Employee billable percentage, for those of you who have to bill for the services that are rendered so that the work is performed and then they’re billed. That’s your employee billable percentage.
Four, I work a lot with SaaS, is software as a service company, software companies, and the big thing is churn rate. How much of it, I mean how many of our clients are not renewing or ending their contracts year over year. Burn rate, how much cash, especially if there’s venture capital involved, how much cash are you burning through every month? Well, how much runway do we have in cash until we run out of cash? The lifetime value of the customer over the cost to acquire a customer. This is a big for SaaS companies because if the lifetime value of a client say is 5,000 and the cost to acquire that customer is 1000, so you have 5X, I would say keep on doing that.
Year over year revenue growth. Year over year, I’m sorry, quarter over quarter and year over year revenue growth. Your monthly recurring revenue, which is a valuation indicator, and your annual recurring revenue. Your gross profit as well. So those are some for four industries. There are more, but this is the ones that I measure.
Hey, thanks so much for watching. Please comment below and let me know what KPIs, if any, are you currently using for your business. Also, if you want to join a community of like-minded, successful entrepreneurs just like you, then join the Facebook group at the link below where I share tips, tactics, and strategies on how do my clients are growing their businesses to seven figures and beyond.
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