Key Performance Indicators (KPIs) are a way of measuring business data that will verify if you are on target to meet your strategic business goals.
It reminds me of the game we played as children: “Hot and Cold.” The goal of the game was to find the hidden object and your clues would come as either you were Hot (very close to the object/goal) or Cold (far from the hidden object/goal).
There are thousands of ways to measure your performance in a business. KPI measurements are multidimensional. You can measure your performance in any area of your business against similar businesses in your industry and/or set internal targets for specific outcomes in financial goals, customer satisfaction, or employee retention, just to mention a few.
Benchmarks to Start
When you start a business, using the KPIs of similar industries can give you a benchmark, or a point of reference, to create a target. And as your business grows, you may want to exceed your industry’s standards (benchmarks) and begin creating KPIs to specifically track other important indicators that may influence the growth of your business in new and innovative ways.
That is the great thing about KPIs: you get to decide your goal and set the indicators (hot and cold) to achieve your desired results. And the more you use these indicators, the more ideas will flow. More inputs help you customize your KPIs to your specific preferences and desired outcomes.
Creating Your Own KPIs
To measure or create KPIs, decide what you want to track, collect the data, and set targets you want to achieve.
To create an effective KPI:
- Decide on your objective or goal.
- Select what you want to measure to achieve that objective or goal.
- Be sure that the information is measurable. (What data will be collected?)
- Identify if It is actionable. (How are new strategies going to be implemented?)
- Assign responsibility. (Who will be responsible to execute the new strategies?)
- Clarify the time frame or how often it will be reviewed. (When will results be reviewed? Daily, weekly, monthly, quarterly, yearly?)
Examples of KPIs
Days to collect on A/R: Track how many days it takes for your clients to pay. If they pay early and on time, more cash is available. Strategy: You could review how your clients pay and offer other payment methods like credit cards or online payment apps. Another way is to offer discounts on cash payments if they pay early.
Scenario: Days-to-collect stands at 45. Goal is 30. The first month’s KPI could target 35 days-to-collect. The next month’s KPI would shoot for 30 days-to-collect after two complete billing cycles. These are measurable, attainable results.
Days to pay on A/P: Track how many days it takes to pay your bills. The more days you have to defer payment with your vendors, the more cash is available for your business. Strategy: Negotiating better terms allows you to hold on to your cash longer. Have your A/P department brainstorm this one!
Back to our game of Hot and Cold: Feedback (performance against KPIs) lets us know if we are getting closer to our goals, or if we need to switch strategies when the feedback indicates we are moving away from our target.
As you can see in this example how useful the feedback can be with relevant KPIs. Each new data point reveals more of what is happening operationally in your business and can give you insights to new ways of doing business. Now the data becomes more than a measuring stick but a powerful tool for planning and strategizing for success.
Many KPIs – Your Imagination Is the Only Limitation
KPIs can be applied to any part of your business from sales to collections to manufacturing, to customers service calls, returns, and coffee breaks. Here are some Financial KPIs.
|Financial KPIs to Explore|
|Growth in Revenue||Indicates how effective your company
is at generating revenues over different reporting periods
|Net Profit Margin||Measures how much net income or profit is generated as a percentage of revenue. This number indicates how effective your company
is at generating profits on revenue earned
|Gross Profit Margin||Indicates how effective your company
is at generating profits on the company’s sale of goods and services
|Operational Cash Flow||Shows how effective your company
is at generating cash from operations of activities of the business
|Cash Flow Margin||Measures how effective your company can turn sales into cash|
|Inventory Turnover||Indicates how often you are selling and replacing
your inventory over a given period
|On-Time Delivery||Describes what percentage of total products are delivered on time. [Set the goal for 100% on-time weekly and consider rewarding your employees if they achieve it.]|
|Current Ratio||Measures liquidity. Current Ratio compares the totals of the current assets and current liabilities. The higher the current ratio, the greater the ‘cushion’ between current obligations and the business’s ability to pay them.|
|Average Sales per Transaction||Measures the average ‘spend’ per transaction. This number is calculated by dividing total sales by the number of transactions.|
|Average Sales per Customer||Measures the average ‘spend’ per customer. This number is calculated by dividing total sales by the number of customers.|
|Average Sales per Salesperson||Shows the average ‘spend’ per salesperson. This quantity is calculated by dividing total sales by the number of salespersons.|
|New and lost customers||Indicates the total number of new and lost customers (or clients).|
|Employee Turnover||Shows how many employees are leaving. Turnover comes at a high cost. If turnover is high, analyze the reasons and make appropriate changes.|
Recommendations and Conclusions:
Key Performance Indicators are just that. They measure key areas of your business, show how they are performing, and indicate strategies that will enhance your ability to reach your goals. KPIs are used to present a numerical (quantifiable) value that expresses how an organization or project performs.
Are you near your goals (Hot)? Or are you far from them (Cold)? Having the means to measure the gap between the two gives management control over their business. The data gathered by KPI analysis allows companies to know what activities are helping and which might be wasting or underutilizing resources—be they people, time, manufacturing inputs, space, etc.
KPIs by themselves help you strategize and plan for your success. If you would like some ideas on creating the best KPIs you move your company forward, please contact us.