Key Performance Indicators have long been regarded as vital for business success. But with so many to choose from, which ones are best for your business?
Key Performance Indicators (or KPI's) are specific measurements of various parts of your business activity. They are used to check performance against targets or as benchmarks or to monitor trends.
On their own they yield limited information, but as a comparison they can instantly identify areas in need of improvement allowing management to focus ON the parts of their business that will contribute most to success. Much like the dials on the dashboard of your car, KPIs work best when they are few in number.
There are literally thousands of things going on underneath the hood, but if those three or four things showing on the dials are pointing in the right direction, chances are the car will reach its destination. And it should be the same with your own KPI's.
Less is more so it's imperative that the KPI's you select are the ones that will ensure you reach your desired destination. Which, incidentally, is another reason why your business plan is so important.
The best way to ensure you have the right KPI's for your business is to take a step back and examine your business plan for the Critical Success Factors (or CSF's) – the factors you have to get right for your business to achieve its objectives.
One might be cash flow. After all, it's hard for a business to get anywhere without it! So a manager might introduce turnover as a KPI to measure against set targets. And there might be a pleasing trend.
However if increased sales are being achieved by an aggressive discounting strategy they will probably have to increase significantly just to maintain the business' current position.
Therefore a smart manager might also include the achieved margin as a related KPI. Monitoring both turnover and margin will instantly inform management if the strategy is successful and if it will result in increased cash flow.
Of course a sale isn't a sale until the cash is in the bank. So if the business extends credit it is also a good idea to monitor the average amount of time it takes to receive the money.
If increased sales are being achieved without systems to convert that sale quickly into cash the strategy could be counterproductive.
These types of KPI's are called "sub system" KPI's and considered together they can provide some insights on how your business is really performing.