KPI’s for business success
Key Performance Indicators (KPI’s) are the measures through which your business can assess its performance – essentially a set of key metrics which provide you with valuable information about how your business is performing. Regardless of the type of business you are operating in Australia, you can be sure of one thing; competition and the pace of change will continue to increase dramatically in the coming years.
Change is often resisted by the owners of businesses because it is uncomfortable, it’s hard, and it takes a lot of time and effort, however, improving management practices and being adaptable and open to change will help businesses remain successful into the future. No matter what industry you’re in, complacency no longer cuts it.
A key part of the changes required for small business owners is to adopt a much broader set of metrics to measure the state of their business on a regular basis. The monthly dashboard should encompass a whole series of stats far broader than just the financials. The more timely information you have as the owner of the business, the more likely it is that you can navigate the path to success and make the required adjustments to your strategy and approach.
How do you go about building a monthly dashboard? It all starts with identifying the most useful and relevant KPI’s for your business. This is different for every business, and while every business owner intuitively knows which key measures are essential to their organisation, you really need to systemise the KPI monitoring process.
KPIs are both financial and non-financial, and can vary from industry to industry and business to business – what is relevant for a retail business may not be important for a professional services firm and vice versa.
However, there are a number of generic KPI’s that have almost universal applicability. Financial KPIs are generally obtained from historical financial information such as management accounts. These accounts are then analysed to “glean the meaning” of the numbers.
Some of the more commonly used KPIs are:
- Gross Profit Ratio
- Net Profit Ratio to sales
- Contribution Margin of Product Lines
- Receivables Turnover – that is how long it takes to collect your accounts receivable
- Stock Turnover – The number of times in a year the stock is turned over• Earnings per employee
- Wages to sales ratio
- Average sale per customer
The number of KPI’s is only limited by your imagination – the key is to work out what is relevant to your business. Are you collecting any of this information? If you are, do you analyse it and take action on it?
For example, if you are taking 60 days to collect your accounts receivable – is that acceptable? What is the historical trend? What is the norm in your industry?
If you conclude that your Company’s performance needs to improve, then you will need to develop an action plan to improve the situation.
Beyond the numbers – Non-Financial KPI’s
If you ask your accounting department about KPI’s, you will never get past the financial ones – but beyond the numbers, there are a lot of things that are critical to the success of your business that may not be apparent:
- How many phone calls do your staff receive from potential customers each day?
- How many potential customers are converted into sales?
- How many of your customers are repeat customers?
- Where do your customers come from?
- What is the most effective form of advertising for your business
- How many complaints are received?
- What do your customers think of your business?
- How long does it take to turnaround a customer’s order?
These are just some non-financial, frontline KPI’s that may be of critical importance in your business.
Do you collect any of this information? If the answer is no – how do you know what is really happening in your business?
If the business is small enough, and you are actively involved in it, then you may already be aware of what’s going on in the frontline. On the other hand, if you are not involved on a day-to-day basis, this information becomes more critical.
It has been said that ‘you can manage what you can measure’. If you do not have hard facts and data with which to manage your business, then at best you will be making decisions based on gut instinct alone.
The data and analysis are only a means to an end – once you have worked out what is relevant and benchmarked it, then you are ready to move on to managing your business. For example, study the relationship between the KPI’s and your profit line – work out the profit drivers in your business. Focus your energies on things you can change and control, and you should see an immediate improvement.
Let’s look at some examples:
- You have worked out that your business receives 100 calls a day from potential customers, but only 30 end up doing business with your company? That is a success rate of 30%.
Of those 30, they spend an average of $500 each, making each of those 100 calls worth $150.00. If you can increase your success rate to 40% you will increase the value of each phone call to $200.00. Keep doing this and your profit could soar.
What can be done to improve this? Perhaps, your staff members need more training, more incentives? Or maybe your advertising is resulting in the wrong types of customers ringing in? It could also be that your pricing structure does not compare favourably with your competitors.
- You have just analysed your stock turnover days, and they are way too high, why is this? You may be holding too much stock, perhaps you have bought the wrong stock lines, or maybe your sales have fallen below budget.
When used effectively, the KPI’s can help to make your business more profitable and enable you to make more informed decisions. As you measure your scores, you can better manage your performance.
Once you have worked out the most suitable KPI’s for your business, I suggest you establish a regular system for reviewing them – make them part of your monthly dashboard and set the wheels in motion for it to aid your ongoing success.
This blog was originally authored by Amer Qureshi.
