There’s an ongoing debate about the value of annual physicals in the medical world these days. Some argue doing a general assessment when there are no specific problems is not worth it given the cost. But for the individual who has a family history of breast cancer or for those who have specific issues, say diabetes, it’s accepted that there are things you know you need to track. For the diabetic, it’s blood sugar, level of exercise, blood pressure and weight. For the individual with familial breast cancer, it may be regular self exams and mammograms. Based on “evidence”, these indicators have been identified as key things to monitor as they could well predict a problem before it becomes serious.
In business, depending on the type of business you have, its size, the competitive situation, there are also indicators – based on evidence – that can predict potential problems and give you time to implement strategies to mitigate them. They are known as KPIs – Key Performance Indicators.
Sarah has a retail store selling women’s clothing. Monthly sales is a KPI that she tracks religiously but equally important, she’s found, is the aging of her inventory. If items stay in the store too long, they will be written down. And the longer they last, the steeper the discount. Keeping track of how fresh her inventory is by product line not only makes sense to preserve her margins, but it also helps her assess whether or not to continue on with a line and how to quickly move a line if it’s staying on the floor too long. Payables are also a key indicator. Her cash flow may feel healthy because she is generating strong sales, but if most of her payables are over 30 days, her feeling of prosperity may be short-lived.
Maya is a clothing manufacturer. She is heavily indebted to the bank. She calculates inventory on a cost basis for her bank although her inventory is stale and many seasons old. A cost basis, in this case, is inadequate and providing a false sense of security to her bank and to herself. Aging her inventory is a much more reliable indicator of how likely the product is to sell and at what price it should be valued.
Rebecca is a social media strategist who has 10 regular monthly clients for whom she does weekly updates and provides content. She is uncertain about her ability to keep these clients as more and more people are buying their own small-business versions of Hootsuite and creating their own content complete with analytics. She knows her content is what sets her apart but do her clients? Her experience has shown that analytics are not useful unless they are tied to results and action points. Her Key Performance Indicator is her ability to turn posts, adjusting them as needed, into new followers who are potential customers. Demonstrating how she can increase the number of followers, her KPI, helps her show value for her service.
How do you determine what your KPIs are? What are the things you need to monitor to ensure you stay in business, prosper and grow?
Your accountant or business advisor can help. But here are a few examples to get you thinking:
Are you generating new customers? Retaining existing customers? Those are easy KPIs but how about tracking the cost of new business development? You may be successful in getting new customers but at the expense of making money if your acquisition costs are too high. Maybe it’s better to keep existing customers happy and provide loyalty discounts.
Do you have high customer satisfaction – speedy service, low rates of returns, repeat sales. Amazon, the hugely successful e-tailer has bet everything on making customers happy and this is what drives their business. One way they know if customers are happy is to track employee productivity diligently – if a package is a day late because the employee is not meeting his/her target of sent packages, you have an unhappy customer. In this case, they have determined employee productivity (one of their many KPIs) can influence customer satisfaction (a notoriously hard factor to measure).
Cash flow is crucial for every business. Days to collect receivables or aging of inventory can both be powerful KPIs that impact cash flow. What are the factors that influence your cash flow? Are you tracking them?
- Human Resources
How productive your employees are may be crucial to your success. How quickly and effectively customer complaints are dealt with may affect future sales. High absenteeism due to sick leave may suggest a morale problem. What are the KPIs you use to track how well your people are doing and what does this information tell you about your business?
These are just a few examples. To identify what’s significant for you, think about what is most important to your business. What are the factors that will warn you of potential problems or opportunities? Don’t settle for the obvious – think hard about indicators that will generate insight and results that are actionable.
Finally, once you have your KPIs, how can you make sure they are used effectively? They should be:
- Collaborative – people should know what you are tracking and why. Often solutions to problems come from unexpected sources;
- Meaningful – does what you are monitoring have the potential to impact your business;
- Understandable – have they been articulated in clear language;
- Time balanced – are you considering things that affect your business in the short term as well as in the long term.
By understanding and measuring your chosen key performance indicators, your business, like the diabetic who measures their blood sugar, is much more likely to have a long and healthy life.