How do you know when your business is performing well?
Do you judge that by the number of phone calls you receive from your creditors? Or do you rely on your bank balance to tell you the story? I’m suggesting there’s a better way – through measurement of Key Performance Indicators or KPIs.
But what are they?
You will have heard time and again about the need for planning in your business – to set a target for production, for sales and so on. And the reason is obvious; if you do not know what you want to achieve, how will you ever know if you have achieved it, or even if you are doing the right things to achieve it?
This is why you NEED a business plan.
Part of any business planning process involves identifying the critical success factors for your business – those things that you absolutely must get right in order to be successful.
These critical success factors will be related to such things as which processes:
- Are most important to the customer
- Have the greatest impact on your cash flow
- Have the greatest impact on return on my investment
- Directly impact team morale?
BUT PUTTING THE PLAN IN PLACE IS ONLY PART OF THE STORY…
If your progress towards your goal is never measured, you will never know whether you are getting the critical things right.
So, in order to manage a business towards its objectives, you must put in place a system of business performance management. In other words, you need a set of what is known as…KEY PERFORMANCE INDICATORS.
Key performance indicators are a measure of a business activity used to establish how a particular process is actually performing. And remember this…KPI’s are not always measured in dollars. Many critical success factors, such as customer loyalty, must be measured as well but loyalty is not easily measured in dollar terms. A better measure may be the average length of time they have been a customer or the number of times they make repeat purchases. Here are some other examples of KPI’s that are not measured in dollars and cents:
- Average debtor days, which relates to cash management.
- The ratio of complaints to the number of items sold, which relates to customer service.
- Absentee rate, which is a big indicator of the morale of your team, as well as translating as lost production or sales.
There are thousands of Key Performance Indicators that could be used to track your business’ performance.
The key to effective KPI use is to identify a small number that measures really critical activities for YOUR business.
WHERE CAN YOU USE KEY PERFORMANCE IN YOUR BUSINESS?
These are some of the areas where they will be necessary.
- Customer satisfaction.
- Product and service performance
- Supplier performance.
- Operational efficiency
- Financial performance
- Performance relative to competitors
WHAT ARE SOME OF THE KPI’s YOU COULD USE?
- Percentage of orders not delivered on time
- Defect rate
- Warranty costs
- Order processing time
- Average sale value
- Number of customers
- Percentage of repeat customers
- Average production cost per unit
- Market share
The purpose of measuring KPI’s is to know the important numbers in your business. If you don’t know them, HOW CAN YOU IMPROVE THEM? They give you the information you need about your business to enable the right decisions to be made.
KPI’s provide a mechanism to facilitate team understanding of what is important to the business’ success, and so ensures the team is focused on the right measures.
About David Officen
David is the Founder and Managing Director of proCFO (www.proCFO.com.au).
David combines an accounting and consulting background with commercial experience both as a manager for large commercial businesses and as the owner of private and family businesses.