We are into summer of 2023 and small business profits are getting squeezed tighter and tighter as employees ask for raises to deal with inflation and customers are not as willing to accept price increases since prices have been increasing since the start of COVID 19. There is also a cash hangover from the PPP and easy money that helped fuel growth and keep businesses going and now I am seeing a lot of companies that are struggling, so I wanted to share some insights on how to improve profits through KPI tracking.
Here is a video walkthrough of the blog post 🙂
I have written some articles before on improving margins through price increases and improving efficiencies but some of these strategies are a little harder in today’s environment so I am seeing opportunities by looking at operational KPIs. The end result will be better margins and profit but I wanted to share some examples to help drive these results.
The first step is understanding the constraints of the business.
- Hiring people to keep up with growing demand or employee turnover
- Equipment for your staff to use
- Capital to buy inventory or hire staff
- Seasonality of busy and slow months
- Getting new customers or sales and marketing efforts
Sometimes if you can’t keep people you end up having to pay hihger amounts to attract new staff. If your staff is on a fixed salary then your metrics might be billable hours / week or revenue / day to get the highest return or margin on your fixed salary costs. When you are trying to improve these metrics you may need to understand operationally what is keeping your staff from achieving higher levels – is it admin tasks and meetings, time spent driving, equipment or other constraints? Are there harder customers with exception orders that decrease their efficiency?
There are trade offs – and some of them are short term vs long term such as having managers do the work themselves or train lower level staff to be able to do the work going forward.
My recommendation is to determine what some of the Key Performance Indicators (KPIs) are for your business and start tracking them on a weekly or monthly basis.
Here are a few samples –
- Billable hours / week
- Revenue / Day / Worker
- Equipment downtime %
- Admin % of time
- Profit margin / customer
- Lifetime Value / Cost to Acquire Customer
Hopefully when you start to track these metrics and can investigate why they are higher than you want and then you will understand your business better and be able to make changes to improve the metrics and increase your profits.
When you analyze the data you will find areas to improve either by hiring better staff or more than likely just communicating your expectations and goals.
- Sales staff that have sales lower than their salary
- Staff that should be 80-90% billable but in reality, were 80-90% unbillable because they were afraid to charge time to clients.
- Customers that are not profitable or are not paying their bills and are a cash drain on the business. I usually here some objections about loss leader services or entering a new are of the market / new type of customer and pricing low to get initial work. These are strategies that come with a cost and should have a set amount of time otherwise you may find out later that you have been hemorrhaging cash for over a year
By measuring and reporting the metrics you will find ways to drive improvements in the metric and profitability.
We recomend weekly or monthly tracking of most metrics and sharing the results with the team. Get their feedback on the challenges to improving the metrics and start creating inititives or changing your strategy of the company to overcome some of the obstacles. You should investigate poor performing periods and find out the reasons why the performace was bad.
Create tasks / goals for the next Quarter to improve your KPIs / Profit
This is my favorite part. When you have the ah ha moment that somethign is broken and needs to be fixed. Brainstorm solutions and the pros and cons of the solutions as there are always trade offs. There may be a lot fo ideas so try to pick the 1 or 2 that you think will move the needle the most and focus on those as doing too many will only distract you. If you choose wrong you will see that the metrics are not improving and then if enough time has been given to the initiative then you can choose another one 🙂
Here is an example of some quarterly planning goals or rocks with the benefit shown in ()
- Revamp mentor program (improve staff turnover)
- Roll out antivirus software (long term investment)
- Customer and Staff Surveys (reduce customer and staff churn)
- Quality – develop process to check staff work / guidelines (reduce customer churn)
I think going through the process of coming up with areas to improve the business and asking staff or your execitive team for the feedack is the most fun part about growing a business. And no matter how it goes you will be learning and eventually preparing yourself for better profit and growth.
Good luck 🙂