Using KPIs gives you better business insight
Published 24/11/2015 | 00:00
Q WHAT are KPI's and how can your business use them?
A How do you measure the success of your business? How do you find out what areas in the business are performing and is there room for improvement? KPI's (key performance indicators) can help you measure this. Using KPIs can give you better business insight and can be used to plan ahead for areas in the business.
WHAT IS A KPI?
A KPI is a metric, which means it's a way of measuring your business. In order to be effective, A KPI should be:
- Relevant-The best metrics are those that have the most impact.
- Balanced-Measure short, medium and long-term KPIs.
- Understandable-Everyone in the business should know what the KPI means.
- Shared-Everyone in the business should know why it's important.
BEING SMART ABOUT YOUR KPIS
One way to evaluate the relevance of a KPI is to use the smart criteria. The letters are typically taken to stand for Specific, Measurable, Attainable, Relevant, Time-bound. In other words:
• Is your objective Specific?
• Can you Measure progress towards that goal?
• Is the goal realistically Attainable?
• How Relevant is the goal to your business?
• What is the Time-frame for achieving this goal?
If you're measuring key performance indicators then you need to concentrate on key areas of business. There's no point in measuring things that won't make a difference to your business over time. The number of KPI's used for measurement depends on your business. Small businesses may only need half a dozen or so. Larger organizations might have that many per department.
Effective key performance indicators can be organized into groups. Here are four groups that could have a big impact on your business.
1. Efficiency-Reducing waste and making the most of your resources; Finding ways to improve staff productivity.
2. Growth-Increasing your sales, measured by gross and net revenue; Customer service improvement performance.
3. Operational-OptimiSing time and resources for staff; Rotating inventory levels to help control inventory turnover.
4. Financial-Reducing credit risk by lower the debtor days. Improving profitability in the business by measuring net profit percentages and average margins.
A good accounting software package can be used to track some of these KPI groups. And if that software is cloud based, you can keep an eye on your KPIs from anywhere and at any time.
KPIs are useful tools to help you measure the performance of your business but you need to understand the metrics. A sales dip recorded by a KPI might be due to seasonal variation. For example, people don't buy much winter clothing in summer. There's not a lot you can do about that - it's not your salespeople's fault.
So it is important to understand what KPIs are telling you before you try to solve a problem. If you use common sense, key performance indicators are useful tools. Again, your accountant can really help out by interpreting the message the financial metrics are giving you.