You manage what you measure. Key Performance Indicators let you know, at a glance, how your business is doing.
But there are dozens of KPIs to choose from. Which should you use, and when, to get a clear picture?
It depends on your place in the entrepreneurial lifecycle.
Take the test here to find out which phase of entrepreneurship you’re in. Then, read on:
In the Founder Phase, you want to keep it simple. The KPIs you need to measure are:
ARM – Average Revenue per Month (per member or client). In an average month, how much does your average client pay you?
If you’re on monthly billing, this is the total of all recurring billing plus any other purchases the client makes. To calculate, sum all of our service revenue and divide by the number of clients served.
For example, if you own a gym, ARM is the sum of all memberships, personal training, nutrition coaching or specialty programs you sell, divided by the number of clients you have.
If you own a therapy clinic, your ARM is the total revenue made from all modalities divided by the number of clients you saw (not the number of visits.)
If you own a dental office, your ARM is the total billable revenue divided by the number of patients you treated (not the number of appointments.)
ARM is a measure of your sales process.
In cases where your model includes some retail sales, like clothing or supplements, include your retail sales ONLY when your profit margin on retail products is over 33%. If your margin on t-shirts is 10%, don’t count t-shirt sales toward your ARM.
LEG – Length of Engagement, usually measured in months. How long does your average client stay with you?
LEG is a measure of your operational excellence. Many entrepreneurs can increase their profit fastest by focusing on LEG, which is why we work through operations first in the Incubator.
LTV – Lifetime Value of a client. What is the average new client worth to your business over their lifetime?
To determine LTV, multiply ARM x LEG. Knowing your LTV is critical before you start marketing, because you have to know whether to focus on gross headcount or quality leads. In most service businesses, the quality of your clients is far more important than the total number, so LTV tells you whether you’re ready to grow or not.
Fixed Costs – the expenses that recur every month without changing. For example, your rent doesn’t change (or at least it changes rarely, and follows a predictable schedule.) Your internet bill doesn’t change. Your heating or cooling bill might go up or down, but it never goes away, and rarely changes by more than 10%. These are your fixed costs: you know they’re going to be there every single month. And your job, as a Founder, is to minimize these fixed costs. To do that, you need to track them.
Profit – Revenue minus fixed costs. Your goal, in Founder Phase, is to reach the breakeven point and pay yourself at least $100 per week. That might mean you don’t declare a profit at all, but you’re not declaring a loss either. We call this “breakeven plus”.
In the Farmer Phase, we need to track a few more KPIs.
ARM, LEG, LTV, Fixed Costs and Profit are still tracked the same way. Fixed costs, especially, must be kept under constant surveillance, because the temptation to add equipment and space is huge for many entrepreneurs. It’s easy to confuse a larger business with a more successful business, but profit is the real scorecard. In the fitness industry, especially, many gym owners add space, equipment and staff, but find themselves making less money than before.
Here are the other KPIs to track in Farmer Phase:
Staff Pay – total staff costs should be 44% or less of your gross. We call this the 4/9 model, but other financial experts use different names. Greg Crabtree, author of Simple Numbers, calculates LER (labor efficiency ratio). But the rule is that every staff person should generate a multiple of what they’re paid. In the service industry, most of your staff will be client-facing, so they should generate at least 2.25x their pay. Looking at it from the other direction, that means they should be paid a maximum of 44% of the revenue they drive.
Leads – A headcount of newly-interested potential clients who are entering your funnel. An audience is the total number of people who saw your ad or were exposed to your brand; a lead took some action to indicate interest. They might have filled out a form on your site, or called your business, or booked an appointment, but they were more than passive observers.
Conversions – The number of potential clients (leads) who became actual clients by making a purchase. They haven’t converted until money has been exchanged.
When you reach Tinker Phase, your KPIs shift from business-specific to personal development. At this stage, you’re no longer working in the business, so you have staff to track and report KPIs. But you ARE working on yourself, and tracking the business’ KPIs will help you set long-term strategy too.
Your staff should prepare and report the above KPIs. As a review, they are:
- Fixed Costs
- Staff Pay
You should personally track some new metrics:
EHR – your Effective Hourly Rate. You want to know how to leverage your time best, and EHR will help you determine where you’re spending time on low-value roles and tasks.
Days off – Yes, you need to rest. Your primary responsibilities in Tinker phase are cognitive: you need to train your brain and allow it to grow during rest periods. Like a muscle, your brain needs consistent training and time to super compensate.
Genius time – loosely defined as “time in flow state”. At this stage, your greatest value is to focus on the single role that grows your business. You must maximize the time spent in that role, and your focus during that time. We call the time spent in your “genius role” as your flow time. You can get our free guide to maximizing your flow time at www.twobrain.com/flow.
These are the KPIs that TwoBrain mentors record and track every month.
If you don’t know where you are, how can you get anywhere?