Why are Metrics & KPI's so Important in Business?
Updated: Apr 14, 2022
First, let’s define what we mean by ‘metrics’ - quite simply, metrics are numbers. They HAVE to be numbers because otherwise they’re subjective and cannot be sensibly quantified.
If you’ve made 10 sales, you’ve made 10 sales - there’s no room for interpretation! Conversely, if you’ve made ‘a bunch’ of sales, well, that could mean anything so it’s not really that useful when it comes to measuring business performance because the goal posts are constantly moving depending on who’s interpreting that data.
So, the question becomes “why are numbers important in business”?
Well, because as a business owner or manager you need to be able to effectively and efficiently do two things:
Turn actions into numbers
Turn numbers into actions
Although this is a massive over-simplification, it captures the essence of why numbers are so important to the success of any business.
How do you know what action to take if you don’t know how those actions are likely to affect your cashflow, profitability, customer satisfaction and employee retention?
It’s for this reason that it’s so important to record all the data your business generates, and use it to generate ideas about what’s working, what's not working, and what you might be able to do differently to get better results.
One of the most important functions of ‘metrics’ is to give the business owner the ability to compare current data to past data following a change in action or approach so see in quantifiable terms what effect the change has had one the vitals of your business verses what you expected to happen.
So what are some good metrics for you to track in your business?
Well, here's my top 10:
Gross Profit (per project/product and as a whole company)
RPE - Revenue Per Employee
Revenue Potential (operational capacity)
EBITDA - basically a company valuation based on assets minus liabilities
Which metrics do you measure in your business, and if you could only measure one which one do you think is the most important to measure?
Remember - look at the results of your actions in business and turn those results into numbers (metrics), then make operational decisions based on what those numbers tell you, measure the results again, and compare your new set of numbers with your old set to see if the change in action resulted in the change of outcome you were looking for.
If you learn nothing else about business management, make sure you learn and implement this principal to give yourself the biggest chances of success.
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