What Should Business Owners Do With KPIs?
If you were a pilot, you wouldn’t fly your plane blindly, without a chart to help you map out your destination and show, in real time, what direction you were steering the plane. Well, the same can be said for charting the course for your business. While a pilot uses height, speed, and orientation in his operations, a business owner uses Key Performance Indicators (KPIs).
The right KPIs provide a clear understanding for how a business is progressing or is expected to perform in the future. The best KPIs provide a snapshot of success for the business and are rooted in the vision of the organization. They are defined, measurable and tied to key business processes and operational activity that supports the company’s overall goals.
Previously in my career when I ran an accounting firm, the financial statements that we produced or audited for our clients were views into the past. Airplane controls, which are real-time and constantly changing, show what’s happening in the present. The good news with KPIs is that you can look not only at the past – and the present – but, if you use the right tools, you can peer into the future. Getting a peek into the future empowers you to alter your course and positively affect the future outcome.
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What’s most important when defining KPIs is that you be as specific as possible and create realistic targets. For instance, you may not want to set a KPI of “popular among affluent customers” because measuring affluence can be unreliable. Similarly, you wouldn’t want to design a KPI for increasing customer satisfaction unless you had a way to measure and track that component, such as a validated survey system.
There is a range of possibilities to measure a variety of metrics. Here are the main types of KPIs for you to consider:
- Profitability measures include sales revenue, gross margin, overhead, and net profit. Measure actual numbers against goals and past results, as well as competitors and industry standards.
- Efficiency measures include use of time, use of people, use of physical assets (machines, property) and use of financial assets (inventory turnover, receivables collection, payables credit).
- Capacity measures include the amount of warehouse usage or storage tank availability.
- Opportunity measures include the number of inquiries, estimates, and orders received by a company. Good opportunity tracking includes your company’s conversion rates at each stage of the sales funnel.
- Liquidity measures include cash flow forecast, current asset ratio, and your quick ratio.
- Trend measures track moving figures over a 12-month period for KPIs such as sales, margin and orders.
KPIs for Your Business
There are no “standard” KPIs that apply to all companies. Sales, profits and cash are numbers every business tracks, but they only tell you the results of your efforts – and these metrics provide a look into the past. If you’re asking yourself what KPIs should my business use, the answer, of course, depends on what it is that you’re trying to evaluate. I can tell you, from experience, that there are some basic ground rules that always apply:
- Don’t use too many KPIs. Too many lessens the focus on the really important KPIs. Keep it simple. Get good at tracking a few, then (if you need to) add more. If you find that a tracked KPI is adding no value, get rid of it.
- Create KPIs that are easy to calculate so everyone on your team can use them to make timely decisions.
- Strive to track KPIs that relate to events happening in the present…
- …while also tracking current indicators that will influence future outcomes. These are known as leading indicators. For example, lead flow is a leading indicator to future sales.
- Don’t overlook the importance of non-financial indicators, such as the number of inquiries from your website or number of customer service tickets.
- A picture tells a thousand words – especially when it comes to trends. Your 12-month moving totals for sales and margin, if shown in graphical form, will pick up a trend far earlier than the figures themselves.
- Consider using a dashboard—a display optimization tool—to keep your company KPIs organized in one place where it is easy to view and analyze the information.
Take your time deciding what your KPIs should be. Once you start using KPIs, it’s important to regularly communicate them to your employees. While some owners are initially apprehensive, my experience is that this helps most employees better align their own work activities with the goals and performance of the company. You should also incorporate KPIs into your performance management system, which may be tied to incentives, raises or profit distributions.
Key Performance Indicators are very effective business management tools. Without them, you really have no clear picture of how your business is performing or where your performance is headed. Take the time to determine what KPIs are important for your business success and implement a process to measure and update them regularly. This will be invaluable to the overall success of your business, because it is true that we manage what we measure!
- Using KPIs to measure your company’s performance can help you determine the areas in which your company is performing well and those that need attention.
- Take time to determine which indicators will be most helpful to your business performance. Start with a few KPIs and then add to them.
- Include leading, lagging, and trend KPIs in your KPI dashboard.
- Update your employees on performance of your KPIs so they can better align their work activities with the priorities and performance of the overall business.
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