Managing a successful business is more effective with the benefit of three things:
- a clear business plan;
- clearly defined measures of performance (Key Performance Indicators or KPI’s for short); and
- reliable and timely information about how the business is actually doing.
Often I write about point 3 - especially in a financial context. Sometimes, about point 1. Today we’re going to focus on point 2. Remember that what gets monitored gets managed (and what doesn’t, generally doesn’t), so selecting the right KPI’s is really important to make sure you are focusing on the right issues.
When deciding what KPI’s to use, consider:
- which areas are critical to your cash flows, sales and profits?
- what areas of competitive advantage does your business enjoy?
- which areas are high risk - which areas are most likely to go wrong?
For each KPI, you want to determine a target. Targets should be clear, relevant, measureable and achievable. The point of establishing targets is:
- so you can track actual performance against the objectives laid out in your business plan; and
- to help communicate to staff, at departmental and individual level, the crucial performance measures they need to focus on.
It is also helpful to identify comparator values (eg from the prior period) so that performance trends can be established for individual KPI’s - is the performance getting better or worse compared to the prior reporting period?
Your KPI’s should be both financial and non-financial, simple, easy to measure and understand, outward-looking, generally long-term focused, and consistently measured and reported. Consider what KPI’s you might wish to establish in each of the following areas:
- strategic - e.g. business growth, response to developments in the market, research & development
- financial - e.g. profits, cashflows, liquidity, stability
- people - e.g. training and development, welfare, productivity
- operational - e.g. production efficiency, wasteage
- marketing & sales - e.g. return on investment from sales and marketing activities
- customer relationships - e.g. customer satisfaction, customer loyalty
KPI’s on their own have no intrinsic value. So once you’ve established your KPI’s, you then need to monitor - and communicate to relevant managers and staff - how the business is actually performing against the KPI’s. This is the important bit that can get overlooked. It is only by acting on the information provided (to address any issues or capitalise on opportunities identified) that the business will derive any value from the whole process.
For assistance with your KPI’s, contact us today.