Key Performance Indicators

Key Performance Indicators (KPI’s) are the measures through which your business can assess its performance – essentially a set of key results which provide you with valuable information about how your business is performing.

Regardless of the type of business you are operating, you can be sure of one thing. Competition will increase dramatically in the coming years. You need to improve your management practices, if you are going to remain successful or perhaps even your survival may depend on how well you manage your business and how innovative you are.

KPI’s are both financial and non financial, although everyone tends to focus on the financial ones a lot more.

The KPI’s vary from industry to industry and business to business – what is relevant for a retail business may not be important for a professional services firm and vice versa.

There are a number of generic KPI’s that have almost universal applicability and we will discuss those in some detail.  Of course you would know what is appropriate for your business – what are the key measures in your business which can let you know how well you are doing?

Financial KPI’s are generally obtained from historical financial information such as Management accounts.  These accounts are then analysed to “glean the meaning” – that is what are the numbers telling you?

Some of the more commonly used KPI’s are:

• Gross Profit Ratio
• Net Profit Ratio to sales
• Conribution Margin of Product Lines
• Receivables Turnover – that is how long it takes to collect your accounts receivable
• Stock Turnover – The number of times in a year the stock is turned over
• Wages to sales ratio
• Average sale per customer
• Earnings per employee

The number of KPI’s is only limited by your imagination – the key is to work out what is relevant to your business. Are you collecting any of this information? If you are, do you analyse it and take action on it?

For example, if you are taking 60 days to collect your accounts receivable – is that acceptable?  What is the historical trend? What is the norm in your industry?

If you conclude that your Company’s performance needs to improve, then you will need to develop an action plan to improve the situation.

Remember the KPI’s are most useful as a tool for better management of your business.  Once you have developed your main KPI’s, I suggest you establish regular system for reviewing them – make them part of your monthly reports.

Non Financial KPI’s

If you ask Accountants about KPI’s you would not get past the financial ones – but behind the numbers there are lots of stories.  There are customers, potential customers, staff serving the customers, products and services – all of these end up in the financial statements in some shape or form.

But there are a lot of things that are critical to the success of your business – yet they may not be apparent from the financial information – at least not easily.

• How many phone calls do your staff receive from potential customers each day?
• How many potential customers are converted into sales?
• How many of your customers are repeat customers?
• Where do your customers come from?
• What is the most effective form of advertising for your business?
• How many complaints are received?
• Have your customers been WOWED by your business?
• How long does it take to turnaround a customer’s order?

These are just some of the non financial KPI’s that may be of critical importance in your business.

Do you collect any of this information?  If the answer is no – how do you know what is really happening in your business?

If the business is small enough and you are actively involved in it then you may know this stuff from being around everyday and talking to customers, observing your staff, dealing with complaints and so on.

On the other hand if you are not involved on a day to day basis, this information becomes more critical.

There is a well known saying that goes ‘you can manage what you can measure’.  I guess it is very true.

If you do not have hard facts and data with which to manage your business then at best you will be making decisions based on gut instinct and hence reducing the possibility of making the best decision and therefore compromising your chances of your success.

If life in business was all about collecting data and doing financial analysis then all the statisticians and Accountants would be extremely successful and have a huge head start on the rest of the world.

The data and analysis are only a means to an end – once you have worked out what is relevant and benchmarked it then you are ready to move on to managing your business.

For example, study the relationship between the KPI’s and your profit line – work out the profit drivers in your business.  Focus your energies on things you can change and control and you should see an immediate improvement.

Let’s look at some examples:

• You have discovered that your average sale per customer is AED 500.  If this would be increased to AED 550 without too much effort – what is likely to happen to your profit?

• You have worked out that your business receives 100 calls a day from potential customers but only 30 end up doing business with your company?  That is a success rate of 30%.

What can be done to improve this?  Perhaps, your staff members need more training, or maybe your advertising is resulting in wrong types of customers ringing in.  It could also be that your pricing structure does not compare favourably with your competitors.

• You have just analysed your stock turnover and it is way too high, why is this?  You may be holding too much stock, or perhaps you have bought the wrong stock lines, maybe your sales have fallen below budget.

When used effectively the KPI’s can help to make your business more profitable and enable you to make more informed decisions.  As you measure your scores you can more easily manage your performance. This is exactly what you need to do to make your business more successful. So get started  right NOW.