North America

Drive your business with Key Performance Indicators

KPI
August 23, 2012

Written by: Lewis Hunter

Use visually rich dashboards to steer decisions based on KPIs. Identifying, implementing and improving key performance indicators are increasingly important as your company grows.

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Management-by-walking-around and gut checks may help you initially, but their effectiveness diminishes as your business expands and you delegate responsibilities. As your decisions shift to strategies from tactics, you must use accurate data to make data-based choices.

Organizing business data “into intuitive and informative reports and dashboards to show how the business is doing in real time, instead of waiting for monthly reports, is a key driver for leading midsize businesses,” according to a report from Gartner, an international information technology and research company.

Key performance indicators (KPIs) track your company’s daily inputs, outputs and activities, such as the number of employees in training programs; sales leads in the pipeline and inventory turnover.

Dashboards with charts, graphs and other visual displays of key performance indicators provide easy-to-read diagnostics for your business, allowing you to quickly resolve problems and realize opportunities. Such timely, well-informed decisions improve profitability by reducing costs and enhancing efficiencies.

Easy-to-grasp dashboards also facilitate discussions with your stakeholders, such as board members, lenders and investors. Use your data to properly frame discussions about challenges and opportunities.

Key performance indicators can be either lagging or leading, meaning you can use them to evaluate past performance or to project future results. Use your dashboards to track growth in target areas, or to monitor your efforts to overcome specific challenges. Warning lights alert you to problems.

What to measure

Your strategy should drive your measurement. Use the major themes, directions, or initiatives of your strategic plan to define your dashboard metrics, or key performance indicators.

At minimum, configure your dashboards to answer the following questions by using the accompanying key performance indicators.

  • Am I getting ahead or falling behind? Track new customers year-to-date, average sale per customer and total sales (in dollars) compared with a year ago.
  • Will I be spending my days chasing cash? Monitor cash-in-bank and accounts receivable of 90 days or less; accounts payable (including payroll deposits to be made) and one month’s payments on all loans and leases; and number of days of operating expenses in cash (all costs and expenses of operating the business for a year divided by the number of business days in a year).
  • Am I doing the things right that I must get right? Calculate the ratios of units sold to labor hours; sales in dollars to number of people; and throughput or cycle time (number of days from when a customer places an order to when they receive the good or service).

Outcome measurements, or the benefits or changes that result from your decisions, are the defining dashboard metrics because they come closest to measuring your effectiveness in pursuing your mission.

You also can measure inputs, which are the resources dedicated to or consumed, such as money and staff time; the activities that result; or the outputs that are the goods or services produced.

How to show it

For most entrepreneurs, a visual presentation is the fastest way to get across a large amount of information – preferably in color. A brief written explanation will often suffice for drilling down but for detailed analysis, numbers presented in clearly prepared schedules and tables have no equal.

Dashboards allow you to add narrative to complex charts and graphs to make it easier to assimilate the data. Consistency in symbols and colors also will speed up analysis over time.

Keep current

As your business grows, you may want to use software to produce real-time data. Make timely decisions by updating your dashboard as follows in the meantime.

  • Daily – Calculate cash-on-hand, total due to vendors and suppliers, amount of next payroll, amount due from customers and approximate inventory-on-hand. Cash-on-hand should be expressed in days of operation. Inventory should be shown as dollars, units and days of production.
  • Weekly – Perform all of your daily calculations and add a 12-week trailing trend. Dependent upon the type of business you operate, your weekly dashboard also should include dollars and units shipped; dollars and units produced; and production payroll in dollars and hours. Production efficiency indicators would also be included in a weekly dashboard.
  • Monthly – Your monthly review should include key performance indicators, as well as lagging financial indicators and key results indicators.

Review lagging financial indicators, such as your balance sheet, profit & loss statement and statement of cash flow, for the month and cumulative. Compare with budgets or projections, highlighting major variations. Also analyze financial ratios such as working capital and debt to equity ratios, comparing them with objectives.

Evaluate your key results indicators, such as sales in dollars, and units; new customers; total customers, average sale and number of sales to same customer.

Assess lagging key performance indicators (output per production employee, sales per employee) compared with budget or production.

Analyze leading key performance indicators (backlog of orders, leads in sales pipeline, prospects in pipeline, prospect to customer conversion ratio, customers lost or dormant, average sale to new customers).

You also should compile more comprehensive dashboards for semiannual and annual reviews. Review the same indicators listed previously as well as longer-term.

Drive safely

If the business equivalent of your speedometer, gas gauge, engine temperature and check oil light will suffice, don’t complicate your dashboard by adding the in-car temperature, direction you’re driving or the miles driven on your trip. Keep your dashboards as simple as possible so that you can spot changes in key performance indicators quickly.

The more data you have, and the better you can articulate it, the smoother your drive will be, on the road to success.

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Lewis Hunter is Founding Partner of ROCG Americas, international consultants to small and medium sized family-owned enterprises, He also is the founder of Hunter & Associates P.A., an accounting firm that helps clients grow and preserve their assets. He can be reached at lewis.hunter@rocg.com