Small Business Performance Metrics
When it’s time to build a business most entrepreneurs don’t think about the statistics. Sure, we’ll do a business plan and fudge some numbers here and there to make it look good and get that nice “hockey stick” look to it which makes investors drool (or ask about your sanity). But once we’ve started the company we look back and think “Oh crap! How do we measure our success?”
That’s the defining moment. Right there. You just had it. The dawning moment you just had about your own business or hobby a split second ago.
Do you even know what your biggest indicators of success are?
Ok, sure… you all just said “Sure I do. If I have more money in the bank this month than I did last month.” We all have that metric if we’re running a for-profit company. But that’s the end result. It’s not the journey. You need to ask how to get all that money in your bank account, and that requires something different.
Each business has it’s own KPIs. These are Key Performance Indicators, and what that big fancy acronym really should stand for is your own knowledge of what’s going to make you successful. If you don’t know your KPI(s), you haven’t asked the right questions yet.
So, instead of berate you all day long, I’m going to give you ours here at Perfect Space. Now, one thing to understand is that these are helpful to our business, and we are iterating on these often. These might not be right for your industry or even your business if you’re a competitor of ours. A second thing to realize is that we have other KPIs which aren’t mentioned here which are specific to our competitive advantage and are kept secret. If you don’t have some secret metrics, you probably don’t understand what your competitive advantage is or should be – and that will make you less effective in marketing your services.
Without futher ado, here are our small business performance metrics:
- For each project (across employees) during it’s lifetime …
- Break even point in number of hours
- Total number of hours spent vs % completion
- Max hours estimated for this project
- Current gross profit %
- For each employee (across projects) during a period …
- Hours billed to projects
- Hours worked
- Revenue billed to projects / total cost (gross profit %)
- For the company as a whole during a week …
- Profit / number of hours worked (gross profit per hour)
- Revenue generated / hours worked (percentage of labor direct)
The important pieces above are the bold ones. The normal (non-bold) items are only there to show the causes of any negative metric or downturn that we might have. I’ll explain why each bold item is important in our business and industry below.
Current gross profit % per project: This metric is important because we need to know when we’re spending too much time on a project. We don’t want to know that we’re over budget when we are finished with it. By then, it’s too late. We need to know in the middle of the project – or preferably at any point in the project. Most service companies get into trouble with projects because they either (a) don’t estimate the initial hours properly or (b) don’t control scope creep. Since we’re growing quickly, we need to be able to know at a moment’s notice so we can figure out why a project might be using too many hours and correct the problem before we get to the end of it’s time line.
Gross profit % per employee: In our case, developers have a direct correlation to the amount of revenue we make. The gross profit per employee statistic allows us to evaluate whether our relationship with an employee is sustainable (eg, is the employee making the company money or not?). In our case, this is a pretty easy statistic to measure considering we have two types of clients; pay per hour and flat bid where we estimate the number of hours it will take to perform the job. Both methods come down to an hourly rate, so our employees must be able to create enough revenue to pay for themselves, the taxes incurred in hiring them and our other overhead and expenses. If someone’s not doing their job, this number will show it quickly.
Profit / number of hours worked (gross profit per hour): Our company-wide metrics like this and the next have to do solely with whether or not we’re able to be sustainable as a whole. Deviations in this number could be caused by a myriad of different variables so we’ll start seeing patterns emerge in work environment, number of days in the work week, major events or news items, etc. We’ll control what we can and mitigate the rest of the risk. Regardless, without this number, we can’t really know whether we’re operating at full speed.
Revenue generated / hours worked (percentage of labor direct): This stat is simply one of knowing our overall productivity for the week. The better we can make our own lives and those of our employees, the more productive we expect to be. We’re going to test this theory with every variable we can think of, but in the end this metric should increase the more we’re able to work effectively.
So now you’ve seen what we measure, but the real question isn’t what we measure, it’s what you measure. Your business is most likely different than ours, so you need to come up with your own KPIs – maybe even for different parts of your organization. Perhaps you need to measure how many contacts a sales person has touched in a week. What percentage of calls did you get an email address from? How many visitors landed on a page and clicked the call to action? I don’t know what your metrics are, but you should.
It may be boring to create these, but the easy way to think about this kind of administrative work is when it’s all simplified down to money in the bank. What gets you more money? Measure that.