Most business owners are aware of the value Key Performance Indicators (KPI) can play in monitoring and driving desirable activity. (If you’re not, I strongly suggest you become familiar with the concept of KPIs – maybe send me a message and I’ll forward an extremely comprehensive list of KPIs for you to consider.)
Now I don’t mean you have to go into overdrive and have hundreds of them measuring everything you do. Start by picking a maximum of five of the more commonly used KPIs – as listed in the below table. Once you are familiar with them you can start considering getting in to more and more detail. Remember the ultimate aim is for you to have the critical information you need to make better decisions.
Well-constructed KPIs provide business owners and managers a lot more detail than just a simple reconciled P&L or Balance Sheet, which is often the extent of their information system.
I recently came across a quote from the great thinker Anonymous – “the odds of hitting your target go up dramatically when you aim at it”. This nicely ties together the concepts of KPIs and budgets.
KPIs will always be even more powerful when used in conjunction with a budget. Rather than just having a KPI that records performance in isolation or compares current performance to what happened this time last year my strong recommendation is to prepare a budget and set a target for the KPI. That way you are monitoring how you are performing against how you expected to be performing.
It is also critical to ensure your budgets and KPIs are about more than the straight financial aspects of your business – must be both quantitative and qualitative measures.
An easy example of that is in relation to monitoring your debt collection system. If you only measure how quickly you get paid you might have a great looking debtor list. However, if the people enforcing the collection policy are being rewarded for the lack of any slow debtors and are like the proverbial dog with a bone you might find your customers are turned off and will go to your competitors. Sometimes the long term relationship means there has to be a bit of give and take. So by all means measure your collection performance but also measure the overall customer satisfaction levels and rate of return buying.
So my challenge to you is to work up front to develop the relevant KPIs through a whole of business budget process, and definitely do not wait to use a KPI or your P&L to tell you where you’ve been.
Let me know if you’d like some assistance.
Commonly used Key Performance Indicators (KPIs)
|BUSINESS AREA||CRITICAL SUCCESS FACTOR||KPI|
|PRODUCTS AND SERVICES||Employee productivity||Output per employee (#, $)|
|Inventory control||Inventory turnover ratio (%)|
|Manufacturing lead time (time)
|Service quality management||1. Cost for administrative error / management revenues ($)
2. On time delivery (%)
MARKETING AND SALES
|Customer activity||Number of customers (#)|
|Customer satisfaction||Satisfied customer index (#)|
|Customer service||Time spent on customer relations (time)|
|Market penetration||Market share (%)|
|Sales operations||1. Direct contact with customers per period (#, time)
2. Sales closed / sales contracts (%)
|Sales volume||Annual sales per customer ($)|
|Employee satisfaction||1. Absentee rate (time)
2. Leadership index (#)
3. Satisfied employee index (#)
4. Turnover of full time employees (#)
|Training and development||1. Training time per employee (time)
2. Training investment per annum (total $)
3. Training investment per customer ($)
|SYSTEMS AND PROCESSES||Information technology||Investment in IT ($)|
|Occupational health and safety||Days lost to injury (time|
|Sales and credit system||Average collection function expense per customer ($)|
|FINANCE||Administrative services costs||Administrative costs ($)|
|Cash management||Cash flow (acid test %) ( closing bank account) .|
|Income||1. Gross margin ($)
2. Profits per employee (%)
3. Profits to total assets (%)
|Revenue||1. Revenues per employee ($)
2. Revenues to total assets (%)
3. Revenues resulting from new business operations
|Yields||Return on investment ($)|