How Do You Keep Score? Tracking KPIs Boosts Profitability.
Most companies keep score of their performance with a simple formula. Subtract expenses from revenue to determine net profit. This tells you what you have. The problem is it does not tell you what you could have earned! It doesn't measure lost opportunities. Can you really measure lost opportunities? The answer is a definite yes. You do it by measuring, monitoring and managing the key activities your people perform everyday. The metrics or measurements of your important business activities are your company's Key Performance Indicators (KPIs).
If your consulting project did not involve defining your business KPIs, or you feel you need assistance in redefining your KPIs, please contact your World-Class Client Care representative at George S. May International Company, 847-825- 8806.
Every business, in fact virtually every type of organized activity, has Key Performance Indicators. Compare your business to a football team. There are three levels of activity that go into scoring: 1) Touchdown; 2) The Offensive, The Defensive, The Specialty Teams; and 3) Individual Performance. In business there are also three corresponding levels of success: 1) Profit or Loss, 2) Activity/Profit Centers, and 3) Individual Performance.
Coaching Your 'Business Team
In football, coaches use information to adjust their strategy, tactics and the actions of individual players throughout the game. Business owners can adjust and respond to business conditions the same way coaches adjust their team's play on the football field, but only if they have the right information. Real-time feedback is necessary to allow your business "team" to perform to its full capability.
Imagine a football team running onto the field to play, while the coaches are walking out the other way. Who would gather the real-time information and make adjustments to the game plan? A business with an owner who uses the accountant's information from last month or last quarter to manage the operation is placing his or her business team in the same losing position as that football team.
The real-time business information you need to run your business "team" the same way coaches run football teams is available to you in the form of Key Performance Indicators. Developed properly, used regularly, and leveraged effectively; specific KPIs for your business guide your entire operation.
All the players on a football team know what's needed to score. They know their KPIs for success. How many of your people know what it takes for them and their company to succeed? Do your employees know their KPIs? Our experience is that most employees do not.
What's Measured Gets Done
An often-quoted phrase about business is: "What gets measured gets done. And what gets rewarded gets done again." In other words, measurements drive performance and rewards sustain performance.
If team members do not know what's expected of them to score, it's little wonder that the business owner is frustrated with their performance. Players always perform best when they know the rules and how to score. This does not require huge effort. One of the surprising facts about general business performance is that even small incremental changes in key areas or activities can have a very big impact on the bottom line.
The vast majority of businesses have four key areas that impact the success of the company and that can be measured:
- Finance
- Operations
- Management
- Marketing & Sales
Each of these four areas has a variety of activities or actions that are measurable and trackable through KPIs. Essential in selecting an activity to measure, monitor and manage with a KPI is that the activity must be a point of contact with your customers or clients.
Creating KPIs
Every point of contact with a customer or a client should be looked upon as a potential KPI. However, not every KPI is as important or useful as another.
The first step in selecting KPIs is to look at the reason you are doing it. Consider your interest from a strategic or profit/loss perspective. What do you want and need to know, and why? Is interest in KPIs due to some problem or crisis in the business? Is one area demanding a more targeted focus? If so, actions involving the problem area must be considered for KPIs. If there's no crisis, but only interest in various areas, then select a few key activities in each area and measure those.
The second step is to meet with your managers. These folks are the heads of business offense, defensive and specialty teams. Explain to them the use of KPIs, their value and that KPIs will be used in rating managers and employees. Obtain their suggestions for KPIs.
Third, meet with your employees. Explain to them how their individual performances are going to be key in making the business more successful, and explain how this will benefit them. Remember, you can change KPIs to monitor an activity that may be more appropriate than the original one you selected. Also, once you have found the essential KPIs that should be tracked, other lower level KPIs or less important ones can be eliminated.
Financial KPIs
Finances are likely the first area that most business people would think of when selecting KPIs to use in improving their operations. Typical financial-oriented KPIs are:
- Cash On Hand.
- Accounts Receivable.
- Accounts Payable.
Operational KPIs
For manufacturers that can easily measure the production of items, operational KPIs are natural measures of performance. For other businesses that are more service oriented, operational KPIs may require a bit more thought. Some examples are:
- Production rates.
- Inventory turns.
- Cost of goods sold.
Management KPIs
In selecting KPIs for this management area, you should treat your employees as if they were the customers, which in fact they are in a management situation. Your employees are the customers of your management actions. Examples of management areas that should be considered as KPIs are:
- Employee satisfaction.
- Injuries.
- Turnover.
Sales & Marketing KPIs
"Nothing happens until a sale is made" is a well-known phrase that highlights the importance of sales and marketing activities. Examples that you can adjust to fit your own unique business category include:
- Customer acquisition rate.
- Customer attrition rate.
- Customer attitude.
Our World-Class Client Care Department can help you obtain the assistance you need to select and develop KPIs, if this was not part of your original consulting project.
Flash Reports
Once you have created KPIs, the final step is to integrate this data into a one-page report. This is often called a "flash" report. Flash reports provide key information in a flash to the business owner and the managers to obtain an overview of essential operations in one quick look. Flash reports will give you the real-time business information to make decisions that can have immediate impact on the function of your business today.
With KPIs and flash reports, there's no waiting to see how your company did the past quarter, you know daily how you are doing. This gives you the necessary information to improve your business team's performance and succeed no matter what your game or industry is.
