Key Performance Indicators
Congratulations on the successful implementation of an information system and establishment of an initial reporting structure. You can now receive financial information from your controller, sales forecast/results from your sales manager and productivity reports from your production manager not to mention dealing with customers and personnel issues.
What can you do with the vast amount of information flowing from the system? How can you tell if you are moving towards your goals? Most successful entrepreneurs will focus on Key Performance Indicators (KPIs).
What are KPIs?
KPI’s are quantifiable measurements that reflect the critical success factors of your business. Each level of management within an organization should have a list of information they need to measure to track how targets are being achieved. For example, a golf club may focus on member retention and attraction, number of rounds per month, and food and beverage sales per member round.
KPIs should reflect your organization’s goals for success
What are the key factors you need to achieve your personal and corporate goals?
If a goal is “to be the innovative leader” in your industry, you could measure your dollar investment in technology, the number of new products released or new patent applications. For a service business wanting to grow in revenue and market share, the number of networking events and investment in advertising and promotion may be the key success factors. If you identified employee morale as a key success factor, you could track voluntary overtime, absenteeism and sick days.
KPIs must be quantifiable (measurable)
To be of any value, they must be definable, measurable and comparable to a budget and/ or goal. For example, if your goal is to reduce the current average collection period for accounts receivable from 95 to 60 days, you need to measure and compare monthly sales, average daily sales and accounts receivable listings.
KPIs are to be acted upon
To improve the performance of your business, you need to review KPIs on a regular basis and take corrective action as necessary. KPIs will assist you in directing your energy to those areas where corrective actions will have the most impact.
KPIs reports—The Power of One Page
- Create a monthly one page list your key performance indicators, for example a twelve month rolling average for sales, gross profit margins by product line, average collection period, inventory turnover.
- A comparison between actual and budget amounts for the current and prior year should be prepared with a brief explanation for any significant variations.
- Build “flag” systems to alert you to a particular risk or opportunity which could arise – for example, if you are exposed to foreign exchange risk, ask your financial controller to notify you if the exchange rates move outside tolerable limits.