Article adapted from Seraf: Portfolio Management for Early-Stage Investors
Measuring and monitoring performance runs in parallel with managing every type of business. Many organizations rely on high level financial statements to show year over year changes and business trends in order to plan for the future. But relatively infrequent and high level financials never tell the whole story. There are many additional metrics to take into account which, when tracked on an on-going basis, may provide insight into the overall health of your organization, and its progress toward key goals.
Collectively, these metrics provide a more complete view of your business – past, present, and heading into the future – and enable business leaders to plan and make adjustments as necessary. The most common term for these kinds of metrics is Key Performance Indicators (KPIs). KPIs have been around for a long time, but they have come into growing focus in recent years. This is due to the confluence of two trends: first is the greater capability and desire to utilize data analytics in all aspects of business. The second is the growing desire on the part of many business leaders to measure the non-financial impacts of their businesses, particularly in relationship to certain non-financial or societal goals.
So, what exactly is a KPI?
A Key Performance Indicator is a quantifiable measure used to evaluate performance of a particular objective over time. It provides succinct, clear and relevant information that is attainable and actionable. An easy acronym to use for selecting a KPI is SMART – specific, measurable, attainable, relevant, time-bound. KPIs can be set to measure metrics across many different business areas depending on your objectives. They can demonstrate how effectively a company is achieving or performing against plan and in particular where it might be overperforming or underperforming so that necessary adjustments can be made.
Here are a few example KPIs we have observed to be helpful for monitoring company growth and performance:
- Net Profit
- Net Income
- Operating Cash Flow
- Number of Customers
- Customer Acquisition Cost (CAC)
- Customer Lifetime Value (CLV)
- Customer Satisfaction & Retention
- Customer Churn Rate
Sales & Marketing Metrics
- Monthly or Quarterly Sales
- Monthly or Quarterly Sales Growth
- Monthly or Quarterly New Leads / Prospects
- Lead to Sale Conversion Rate
As you can see from above, you can have overarching KPIs for the whole business or you can have specific KPIs pertaining to a specific department or objective. Regardless of the magnitude of each KPI, it should relate to a specific outcome with the ability to measure and quantify progress compared to plan.
How do you track KPIs?
There is no one right way to track KPIs. Whatever method works best for your workflow is fine. That said, there are some smart practices that can help. To efficiently track KPIs, teams should identify the objectives, appropriate indicators, means to measure and the reporting frequency. Each indicator should be assigned to a particular individual who will be responsible for gathering the data on a timely and consistent basis. For smaller or simpler KPI projects, data can be saved in a spreadsheet and should show the most recent results as well as KPI performance over earlier periods of time, when available, and how it compares to the plan. It helps to have one central dashboard to show all KPIs at one time to quickly assess overall performance at a glance.
For investment groups and funds that choose to track KPIs across multiple portfolio companies, a more robust reporting system may be needed. With the ability to define and track custom KPIs, clients can follow any number of key indicators that are most relevant to their organization. Once entered, actual and target KPIs display graphically for each company, so it’s easy to tell where performance is ahead or behind plan, and adjust course as needed.
Can KPIs be used to measure impact?
Many mission-oriented organizations use KPIs to measure and report on the impact of their work relative to particular causes or goals. These so-called impact investors can use KPI metrics to address their desired outcome tied to education, housing, job creation, climate change mitigation, gender equality, water and/or waste management, or zero hunger, for example. Once investors identify their target objective, they can establish the specific indicators to measure accordingly. For example, if the objective is to mitigate climate change, then a KPI could be to measure the number of tons of CO2 avoided.
As an investor, what can KPIs tell me about my portfolio companies?
Investors should receive (or insist on receiving) financial statements from portfolio companies on a regular basis. They may also receive an investor update with a qualitative overview explaining how the company is doing and highlighting strategic initiatives going forward. The amount of information and level of detail provided can vary tremendously from company to company. When a set of KPIs are agreed-upon and shared, they can provide a quick performance overview of key business areas and enable investors to monitor what might be driving the top line, bottom line, or triple bottom line figures. Investors can use these additional data points to make more informed, important decisions about their investment regarding timing or additional capital contribution. Plus, for impact investors, KPIs can provide a holistic perspective and a balanced view to make a better investment case not just based on financial returns but rather impact and other value.
It takes time and effort to define, monitor and measure KPIs on an ongoing basis, but when done consistently, the benefits in terms of greater insights and tracking of progress against financial and non-financial goals will outweigh the costs.