When you’re running a business, it can be hard to get your daily tasks done, let alone plan for the future. That’s why many business owners and executives appreciate the ease of using key performance indicators (KPIs) to help track the company’s performance and gauge progress toward strategic goals and objectives.
KPIs are quantifiable measurements that reflect a few of the most important indicators of the company’s current performance. They are different for every business, as well as for different kinds of businesses in different industries.
What’s Important to Your Company?
To decide which KPIs you should track in your business, consider these questions:
- What are the critical success factors for your business?
- What makes your company better than your competitors? Or in other words, what is your unique selling proposition (USP)?
- What factors would increase or decrease the profitability of your business?
- What are the three most important things you would like to know about your business — every day, week or month?
The goal is to discern what really matters to you and your executive team so that you can assess how your company is performing at any given point in time.
How Can You Quantify Success?
Once you have decided what’s most important, the next step is to identify which quantifiable measures will most accurately reflect where your company stands relative to your goals.
Typical KPIs are a mix of financial ratios, production and operations numbers, and sales, HR and non-financial data. For example, depending on your business, your KPIs might include a combination of:
- Financial statement totals, such as net income or sales.
- Financial ratios, such as gross margins, debt-to-equity, return on investment, days sales outstanding (DSO), accounts receivable (AR) days and accounts payable (AP) days.
- Non-financial data, including number of customers, number of items sold, and total number of transactions consummated.
- Production and operations numbers, such as the number of items produced, the number of defects per shift, and wages per item produced.
- Sales figures, including sales per employee, number of repeat customers, and number of customer calls answered.
While it may be tempting to choose many different KPIs to track, it’s wise to track just a few at any one time — no more than five or so. Focusing on a small number of KPIs makes it easier to concentrate on only the most important ones.
How Will You Monitor Performance?
Once you have chosen your KPIs, you must determine how to monitor them. Ideally, your accounting, production and other systems will automatically generate your KPI figures. Depending on the types of indicators you choose, you’ll want to see them daily, weekly or monthly in an easy-to-read format, such as a graphic “dashboard”.
Some KPI dashboards pop up first thing in the morning on every executive’s computer screen so that there’s no way to ignore the numbers. Some even use red, yellow and green icons to indicate whether the numbers are positive, negative or neutral.
Of course, you’ll also need to figure out how you will determine when action is necessary, what action will take place, and who will implement the changes based on the status of each KPI.
Remember that your KPIs can — and should — change over time. Schedule an annual assessment of your KPIs to ensure that the ones you’re currently tracking are still “key” and relevant to your goals.
Because DJB is familiar with your business, we can help you identify KPIs. Let us know if you would like to get started.