Taking Your Business to the Next Level with Key Performance Indicators


Critical Success Factors

Every business, large or small, regardless of what it does, depends for its survival on getting certain things right on a regular basis. These things we call the Critical Success Factors. (CSFs)

These CSFs relate to the business processes and activities that really drive business results. At the top level these are:

  • Processes and activities that are important to acquiring and holding customers
  • Processes and activities that determine revenue
  • Processes and activities that impact on efficiency and productivity
  • Processes and activities that determine team morale

To know how well your business is managing these CSFs, you need a system of measurement. In effect, Key Performance Indicators ARE these measures.  So it’s important to understand how you can develop a set of KPIs that will allow you to monitor performance on these critical processes and activities.

Measuring To Compare And Assess Goal Achievement

Measuring to determine goal achievement and to make comparisons to see how you stand relative to others is really the only point of going to the effort of measuring. In these cases, you have set some goal to achieve, whether it be based on what you have achieved previously, or on an industry benchmark you want to match. In these cases you can use the information to assess how well you are doing in reaching a specific goal.

Depending on that figure, you will know if you need to fine-tune your strategy or not. That is the real point of keeping measures – to be able to monitor business performance and know where you could improve it. The point is, that before you decide to arbitrarily start measuring things, you should take a step back and think about what your goals are in each area – give yourself a target to aim at.

Selecting KPIs To Monitor

There are literally hundreds of KPIs that could be used to track your business’ performance. You may be familiar with some KPIs even though you haven’t thought of them as such. For instance, the value of production output per employee and your gross profit margin both measure some aspect critical to the success of your operations and can be considered as KPIs. But KPIs are not necessarily those things you measure in dollars. Many equally critical activities, such as ensuring customer loyalty, can’t be measured in dollars and cents, so there are in fact many non-financial KPIs as well.

The key to effective measurement though, is to identify just a small number of KPIs, (say 6-8), that measure the most critical activities – and to watch them like a hawk.

A business’ overall goal could translate into a set of goals for different activities. With cash flow, for sales activities this might be simply to ‘increase sales by 2% each quarter’, or whatever. Achieving this will help the business achieve better cash flow. The KPI for this will be gross sales value.

So, suppose we’re monitoring gross sales and we note that it’s not improving. What do we do? Well, you can’t pinpoint exactly where you need to focus your corrective action if you are unsure of why gross sales have dipped. But you can actually determine that by having set up some KPIs to measure the activities around sales itself. By looking at these sub-system KPIs of sales we have a better opportunity to identify the real issue.

Generally, sales are made by obtaining sales leads, and converting those to actual sales. By looking at the sub-system of gross sales…the leads generated and the leads converted…we can quickly see what area isn’t performing. We are then able to take action based on whether we need to address our advertising and marketing to generate leads, or whether or not it is our sales process and methods that need work.

We can then decide if we require additional information, and what type of additional information is required, in order to make a more informed decision. Say, for example, that conversion rates were dropping; we may then need to dig further into differences in sales people’s conversion rates or even look at seasonal comparisons. If we are routinely keeping this type of information we are able to notice trends and react much faster to changed circumstances.

For KPIs to be useful in the management process they need to be compiled and reviewed on a regular basis. How regularly individual KPIs are monitored is dependent on the KPI itself and the process it is measuring. The general rule is that the further down the process level of the organization, the more focused on specific functional activity, the greater the frequency of the reporting.

The frequency of reporting becomes more evident once a KPI is defined. There is absolutely no point having a KPI reported on daily, when nobody looks at it for 30 days or if there is nothing that can be done to adjust the process anyway.

Still, at the manager level a lot of numbers ought to be checked regularly – sales for the previous day, the backlog of orders or deliveries, how much inventory is available and so on. All can provide early warning of developing problems and allow them to be dealt with.

Actions to achieve KPI targets may actually conflict with each other in terms of achieving the overall plan. For example, the goal to minimize inventory stocks may jeopardize another goal such as improving customer order fill-rate. You still set up the KPIs, but you need to consider the strategies for achieving the individual goals so the overall plan is not damaged.

Another example: If the goal was to build gross sales, the sales team might achieve it through massive discounting. Therefore, if one of your KPIs here was ‘number of sales per salesperson’ it might look pretty good. But obviously it’s not a viable strategy and you’d need to have either ruled out discounting as a strategy from the beginning, or maintain KPIs on net margins, gross margins and cost per sale, to ensure it didn’t get out of hand. The way you choose to improve a critical number has to be consistent with the overall business plan.

In summary, that is how to create KPIs. As we mentioned earlier, we gather KPIs for a reason – and that reason is to improve business performance. The basis of improving is monitoring.

There are 3 main ways of monitoring performance:

  1. Have a business plan to guide your activities.
  2. Carry out regular financial analyses of operations.
  3. Benchmark your activities against other businesses or the industry to see how you stand.

Each of these will provide you with the essential underpinnings of a useful KPI system – goals you want to achieve. Knowing the goal allows you to identify CSFs; and knowing your CSFs points to the KPIs you will need to track.

Having a documented business plan provides the opportunity to set out just what you want your business to achieve and how you will go about getting there. In doing this exercise you gain a very realistic appreciation of your market, your competitive positioning and your capabilities. Furthermore, a good marketing plan will also develop some realistic goals to aim for and these become the targets for the KPIs you measure. Therefore, you know that the KPIs you are monitoring are the right ones for showing if the business is going in the direction your plan has set out.

We also recommend that you have a set of key financial ratios prepared on a regular basis as well – not just your profit and loss account and balance sheet but also a detailed monthly cash flow analysis for instance. Your financials form a major set of KPIs for your business.

Remember that KPIs relate only to your own company – they measure how your operations are working out; so many sales per salesperson, so many days in receivables etc. Apart from the fact that these might show you are moving in the right direction, what do they say about how you stand with regard to what other firms are achieving?

If you take the KPI figures from a number of similar firms and use them to construct a chart showing the average figure for poor performing firms, the industry average overall, and how the best performers rate, then you have a benchmark against which you can compare your own performance. This kind of information can provide you with the target figures you use for your KPIs.

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About Don James, CPA/PFS, CFP
Don is the Tax & Financial Planning partner with Kiplinger & Co., CPAs headquartered in sunny Cleveland, Ohio since 1982. He partners with business owners and families and specializes in goal achievement solutions, tax minimization strategies and serves in the role of gatekeeper of sound financial advice.

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