We all want to run our businesses more effectively and profitably. Which numbers do you monitor to get a sense of the overall health of your company? Have you focused on certain key performance indicators (KPIs) in order to gauge the trends in your company — and do you know how to use these indicators to move the business forward?
Key performance indicators (KPIs) are benchmarks that all levels of your company can use in their day-to-day operations. And with the right systems — robust modern accounting, inventory control, and sales management software — you can use “dashboards” to visually monitor performance.
Based on my experience working with business owners, I recommend that each person who’s responsible for measuring operational performance in a business pick four or five KPIs to monitor closely. (There are hundreds of KPIs that can be measured.) Other measurements may also be necessary — but not on a daily basis. I also advise that the key to using KPIs effectively is to track the operational activity and performance of a company using KPIs and then to tie these indicators to the successful attainment of larger company goals.
Here is an example. Let’s assume your sales team has determined that every sale made to a customer requires an average of 20 cold calls to prospects. If the company goal is to have each sales rep close 5 sales per day, then each sales rep would need to make 100 telephone prospecting calls. In this example there would be two critical KPIs that matter to the sales manager: the prospecting calls each sales rep is making, and the number of sales closed by each sales rep. The operational activity is the prospecting call; the company goal is to close five sales. Top performers may be able to close seven sales for every 20 calls. You can use the analysis of the techniques used by the top performer to help increase sales across the entire sales team.
In the above example, each sales rep may have a graphical dashboard on their computer showing how many calls and sales they have made. As they make calls, they can visually see their progress toward the next sale. They can also learn their own techniques for improving their average performance.
Another good example of a KPI involves managing accounts receivable (A/R) as measured in average number of days outstanding. If your company averages 45 days of A/R outstanding, then decreasing the number of days outstanding improves company cash flow, and an increase in the number of days means more of the company’s cash is being used to finance it. Normally senior financial management of a company should be concerned about this KPI, but it may be an accounting clerk who makes customer collection calls. A company goal might be to keep the average days of accounts receivable outstanding less to than 40. The accounting clerk responsible for collecting A/R would have a dashboard that shows him or her where they are in helping meet the company goal.
Because senior management can easily become overwhelmed with following too many KPIs, they should be monitoring those KPIs that give a “30,000 foot view” of the company’s overall health. Examples of the figures that management might review on a weekly basis include gross revenues, cost of goods sold, earnings before interest tax depreciation and amortization (EBITDA), A/R, and accounts payable (A/P).
Some KPI software allows users to drill down into the data from the dashboard to see the detail that supports the KPI. If cash flow is especially tight in a business, senior management may need to watch revenues collected, A/R and A/P balances, and inventory balances on a daily basis. Those particular KPIs are most important for managing a business’s cash.
Once a company institutes realistic company-wide goals for each major company function, and sets up a dashboard system to allow employees to see where they are in attaining those company goals, efficiency can dramatically increase.
Sam Thacker is a partner in Austin, Texas based Business Finance Solutions.