What are the best Key Performance Indicators (KPIs)? How to choose the best KPIs? Which KPIs should we track as a business entity? And why? As an accountant, there is a temptation to apply your training and day job to "measure" anything that can be measured or moved. However, this method often results in an excessive amount of data and unnecessary work that can be avoided!
To help you avoid wasting valuable time and grow your firm the way you want to, this article outlines the most important KPIs and how to choose the best ones for your business.
The fundamental purpose of KPIs
Why does your business need KPIs? The purpose of KPIs is not for introspection or to start fruitless talks, despite what some of your partners, leadership, or team meetings may seem like. They give you an insight into your business and allow you to take action if necessary.
Here are some examples of their purpose:
- They indicate your performance in certain areas.
- They help you detect weak spots, so you can fix them.
- They allow you to take care of potential issues before they become major headaches.
- They allow you to be proactive (for example, scaling up in areas that are successful and down in areas that are wasteful).
If you don´t have KPIs, your firm is wasting time and resources. How do you know what´s working and what´s not? How do you know if you´re making progress towards your overall growth goal? The same goes for if you´re tracking KPIs without reviewing them or acting on the information you find. When it comes to KPIs, often less is more. Instead of monitoring thirty or more KPIs with no particular purpose in mind, it's best to narrow your attention to just four or five and utilise that data to drive meaningful change. That´s why you need to know how to choose the best KPIs.
Read:Â These 6 ingredients are essential if you are going to grow a one million accountancy practice
Indication types: leading and lagging
Profit, revenue, and new clients obtained, are lagging indicators commonly tracked by businesses. All of these metrics are excellent KPIs to monitor, however, they serve as examples of the final product. On the other hand, leading indicators are those that must be done to get a specific outcome. Naturally, keeping an eye on both leading and lagging indications is preferable. Why? Because, if you want to be able to predict if there will be a problem in the future, you must measure not just the lagging indicators but also the leading ones.
For example, consider the inflow coming into your business. Many businesses will track their top-line income and the number of customers they gain. However, these are considered to be lagging indicators. If the company has a dry spell, such lagging KPIs wouldn't always reveal what's incorrect or missing. Instead, if the company monitors key performance metrics that affect its capacity to attract new customers, it may head off any potential issues before they escalate. Examples of such possible precursors are:
- Percentage of a company's available resources being used to produce billable services.
- The monthly total of new business meetings held.
- Pipeline size and worth of pending projects for a company
Determine your Multitasking KPIs
As we mentioned before, it's simple to over-monitor your company's KPIs, so try to identify multitasking KPIs (i.e. those that serve many purposes). These indicators provide you with a wealth of information about the health of your business. Take the leading indicator of chargeable job utilisation rate as an example. This is a great indicator of:
- Profitability and business/departmental efficiency,
- Revenue, and;
- Capacity as of now and whether or not to expand the team
If you focus on identifying your Multitasking KPIs while deciding on the best KPIs for your business, you will save time and energy when measuring and monitoring as a result.
Businesses KPIs and Employee KPIs
Your business's KPIs should be based on your employees' KPIs as there will always be a direct link between the two. For example, their personal chargeable time target will be the same as the company's overall chargeable time target, and their leading indicators will be directly related to the lagging indicators you want to achieve.
Leading indicators are the best choice for employee's KPIs. Why? Because you can only control what goes in. If you know that the right people are doing the right things, then this should lead to good results for the firm. Remember this when you set your employee KPIs! It´s also good to bear in mind that the less experienced an employee is, the more leading indicators rather than lagging ones they should have.
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How to choose the best KPIs for your business
KPIs are intended to elicit action, but you need to be measuring the right ones. Indicators that tell you that things are going well and you should keep doing what you're doing! Or if things aren´t working, flag these areas so you can review what changes need to be made.
Since there are three pillars that make up any successful firm - providing value to the clients, delivering a great service, and achieving your own goals to grow the practice - your KPIs should be centred around these. Here is our 3-step process for how to choose the best KPIs.
Step 1: Providing value to your customers
The phenomenon of âThe Queen Bee Activityâ is discussed in Mike Michalowicz's book, Clockwork. When you look at a bee colony, every bee knows that the Queen Bee producing eggs is crucial to its existence. The colony expands and thrives when the hive guards the queen and lets her begin producing eggs, therefore, The Queen Bee Activity for the hive is egg laying.
When applying this metaphor for a tax practice, the Queen Bee Activity is the one that the business should concentrate on. And this could include:
- Lowering clients' tax liabilities
- Assisting clients in expanding their businesses
- Taking away the worry of taxes.
So, the first step for how to choose the best KPIs for your firm? Identify your Queen Bee Activity/ies - i.e. the most important tasks that provide value to your customers. (Find out How to use extraordinary client service to generate client referrals)
Step 2: Client and prospect communication
When you understand your company's Queen Bee Activity, you can set KPIs to track its performance. For instance, if your company's Queen Bee Activity was "communicating with clients and prospects," some KPIs for the company could be:
- Weekly customer contact time
- Weekly business development time
- Client satisfaction rating
- Job turnaround times
Essentially, step two is identifying and tracking the KPIs needed to deliver the value you identified in step one. (Need more help? Find out How to keep in touch with potential clients, without feeling like youâre stalking them)
Step 3: Assisting the business's owners in achieving their own aims and desires
Regardless of how large or small an accountancy practice is, the business must provide for the owners. Perhaps it exists to pay for their lifestyle or to allow them to live in a specific manner. For example, if the business owners value working 25 hours each week, this must be measured and monitored.
After you have identified your KPIs needed to provide your clients with value and deliver this value every time, you then need to turn your focus internally. What is your growth plan for your firm? What KPIs do you need to track? Do these cover your why and your purpose for your firm?
** Don´t have a growth plan? Learn how to create a 3-year plan that you actually execute! **
What should I do now?
If you take anything from this article, it is that now is the time to examine how your company is using its KPIs. For example:
- Are you assessing what is truly important at the corporate, department, and individual levels?
- Do you have a good balance of leading and lagging indicators?
- Where is your company measuring for the sake of measuring? Could you minimise the number of KPIs?
- Does your business's leadership have time set aside to monitor and act on the business's KPIs?
Measuring success and progress is crucial for any business, but figuring out the right metrics can be daunting. If you use our 3-step process, however, you should be able to understand the KPIs that are relevant to your business and which are the most important ones to focus on. And once you know this, you can accurately measure your success and make better decisions about where to allocate resources to move you closer to your business goals.