Do you have the right Key Performance Indicators?

Key Performance Indicators or KPIs are a staple of business, especially in corporate life, and I’ve read several articles quite critical of the practice because big companies have a way of overdoing it and measuring aspects that distort larger truth.

This hardly ever happens in a small business. The usual problem is that the business owner doesn’t have enough accurate, timely and relevant information to make good judgements and expedient decisions. In some companies the problem is not conducting competent up-to-date bookkeeping. If you don’t know, for example, how much money you are owed and by whom, you might find that very inconvenient, especially when you don’t know how much you owe and to whom.

Objectively, bookkeeping should be an easy problem to solve. Turn it over to a competent professional.

But there are more stars in the sky to track than those that make up basic accounting measures. Each industry has its own special elements that need attention. If your business uses some kind of application software it might provide these KPIs for you from a suite of reports. I have a client in a medical profession who employs this application to run office functions and track clients.  But, giving due attention to the rich information in the database requires curiosity and an investment of time to make the most of the tool.

Other kinds of businesses have to manually track the important stuff and possibly give creative thought to what should be tracked as a KPI. Knowing what more sophisticated peers in one’s industry do can be very helpful.

As an example, a retailer wants to know not just sales totals but average sale, customer counts by period, number of items purchased per transaction, days of inventory, inventory turn, sales dollars per payroll dollar and a many other similar stats. It is certainly possible to run a store (at least for a little while) without knowing any of these things.  But eventually a reckoning will come to the ignorant and unobservant.

This article from the developer of QuickBooks lists some popular financial KPIs.

The top seven items they tout sound important, but some are more relevant for some businesses than others. Inventory? Not for a service business.  Accounts payable turnover? Not for a business in an industry where payment terms are cash and carry.  One really has to study what dials and gauges on your dashboard (sorry, corporate speak) are vital. The best KPIs are the ones that help you spot trouble and attract necessary attention that you might be unlikely to offer otherwise.

I favor this article’s treatment because it outlines the reasons you should develop KPIs, even those that are nonfinancial but more operational in nature. The publisher is another small business financial software company, Xero. Among their recommendations, make sure your KPIs are as follows:

  • Relevant
    The best metrics are those that have the most impact.
  • Balanced
    Measure short 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.

Business isn’t only about numbers, but just like in sports, measuring the right things is a path to improvement.

— Frederick Welk
CEDF Business Advisor

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