Our last blog, “How to Track and Use Financial KPIs for Your Business”, covered essential lagging financial KPIs your business should be tracking and how you can use them to narrow your focus and pinpoint the areas where you need to improve.
But that’s only half of the story.
Not only do you need to measure past performance to make better decisions for your business, but you also need to have accurate forecasts of where you expect it to be down the road. With the help of leading KPIs, your business can identify areas for improvement and take proactive steps to solve the issues before they become larger problems.
In this article, we’ll cover some of the essentials of leveraging leading KPIs and how they can help move your business forward.
Table of Contents
Why Measure Leading KPIs?
One of the primary reasons for measuring leading KPIs is to track and assess performance in areas that have a significant impact on achieving business goals.
However, because each individual business has its own set of goals, each business will also have its own set of KPIs to track. The KPIs you choose should be able to help your business gain insight into how you can improve operations and stay ahead of your competition.
With that information, you’ll be able to:
Make data-driven decisions
Improve business performance
Achieve your long-term goals
Leading KPIs Every Business Should Track
People are Your #1 Asset
People KPIs are excellent leading indicators. Considering people are your #1 asset, you have to make sure they are happy. If you use Gusto (our favorite payroll provider) you can use their simple employee survey that tracks employee happiness in real-time.
Capacity is another key KPI. Tracking capacity allows you to make sure your people are not overworked and you have the insight to know it’s time to make a hire.
At A2 advisers, we keep it simple by knowing how many clients or projects someone can handle. Then, track the number of clients/projects per person in real-time.
Below is an example of how you can track capacity:
Let’s break this down a bit:
Calculating Overhead Rate
The allocation of overhead ("OH") is an art formed by science. To calculate the allocation percentage, consider all the expenses associated with people working on your services. Then, allocate them by person and/or estimated projects in a year.
In most cases, the overhead allocation percentage should be around 20% to 35% of an employee’s payroll.
Read more about calculating overhead rates and see an example in this blog post.
Calculating How Many Potential Hours a Person Can Work
You always want to build in additional capacity. At A2 advisers, we say to consider your person 80% billable (as noted in the graphic). This is because it allows you to:
Add on additional clients before you need to hire someone
Give them additional projects if needed
We also recommend you factor in paid time off (“PTO”) policies you plan to have in place in two to three years to build in even more capacity.
We are not fans of tracking time, but you will at least need to monitor a few projects or clients to get a sense of how much time is required for each one. This is how you will be able to find the maximum number of clients per person.
Forecasting Your Backlog
Forecasting your backlog means taking a look at your projects and determining how long it will take to complete them. Based on this analysis, you can estimate how much work will be remaining in the backlog at any point in time.
When you understand this, you can forecast how much revenue will be coming in and when.
At a minimum, it’s essential to know how much revenue you will generate in the next 3-6 months. With this information, you can make better-informed decisions on when to add or reduce resources in your business.
Forecasting your backlog also gives you an idea of when you can hire. It lets you lay out how many clients you have per person, allowing you to capacity plan more efficiently.
Finally, forecasting your backlog gives you a measurement for when it’s time to increase prices. For example, as you backlog grows and capacity shrinks, it may be a good time to look into value pricing. We discuss more on value pricing here.
Stay connected with our blog as we will dive deeper into forecasting in a later issue.
Net Promoter Score
The Net Promoter Score (NPS) measures client loyalty and satisfaction. The score is based on a simple question: "On a scale of 0-10, how likely are you to recommend our product/service to a friend or colleague?"
Based on their response, customers are then categorized into three groups:
Promoters (score 9-10): These are customers who are extremely satisfied and loyal to your business. They are likely to recommend you to others and contribute to positive word-of-mouth marketing.
Passives (score 7-8): These are customers who are satisfied with your business but are not overly loyal. They may recommend the brand to others, but they aren’t as enthusiastic as people who score 9-10’s.
Detractors (score 0-6): These are customers who are unhappy with your business and are likely to spread negative feedback.
To calculate your NPS, you subtract the percentage of detractors from the percentage of promoters. The score can land anywhere from -100 (if all customers are detractors) to +100 (if all customers are promoters).
A positive NPS shows that your business has more promoters than detractors, while a negative NPS shows that your business needs to improve its customer experience.
At A2 advisers, we keep it simple by asking clients at the end of each meeting what they would rate it on a score of 1-10. You can do the same!
When it Comes to Leading KPIs, Less is More
Remember, as you start measuring KPIs, quantity does not beat quality. Make sure you are tracking only the most essential metrics. You can derive better insight in your business by selecting KPIs that fit your business’s goals.
And don’t forget to keep it simple! You need all of your team members to be able to understand what you are tracking and why so they can better contribute to your goals.
Book a discovery call today to learn more about the ins and outs of leading KPIs and take the first step toward clarity and confidence in your financial future.