As businesses grow they find that maintaining control and understanding what is going on gets harder and harder.
Add to this the fact that their accounts get more complex and it can be difficult for business owners to understand what is actually going on and that is where KPIs come in. KPIs are a great way to monitor performance, whether that is at a company-wide level or as a department or a function.
So what exactly are KPIs and how can they help you manage your business?
In this post, we are looking at KPIs and what they can do for SMEs including;
- What are KPIs?
- What are the benefits of KPIs?
- How do you decide on your own KPIs?
- Can software help with KPIs?
- Some examples of KPIs
What are KPIs?
Key Performance Indicators or KPIs are a series of metrics that give business managers a clear sight of what is happening in the organisation.
There are two important phrases there – Key and Performance.
Let’s deal with the ‘key’ part first.
The drive to start using KPIs generally comes from the fact that as an organisation grows it generates more and more data.
Before long managers are so inundated with information that they really don’t know what is important and what is not.
Often this leads to managers focusing on the wrong things, things that won’t make any real difference or in extreme cases, they disconnect from business information completely.
So the act of choosing and adopting your KPIs is about teasing out just a few very important metrics that give people clarity over business performance.
The performance part is really about making sure that the metrics you choose to measure are really about what is going on in the business rather than just things that are nice to know.
For example, you may think that it is interesting to know how much your business has spent on capital assets over the past year but that is unlikely to be something that makes a real difference on a day to day basis.
What we should point out here is that there isn’t a single set of KPIs that suit every company. Every business is different and even in the same industry and with businesses of the same size, their KPIs could be quite different.
What are the benefits of KPIs?
There are a variety of benefits of KPIs and just as KPIs may be different for different organisations, so the benefits may be different too.
So there are a series of benefits that may or may not be achieved by your organisation including;
They help to understand complex information quickly
The bigger your company gets, the more data it generates and often that data can be very complex.
KPIs help businesses take complex data and information and distil it down into understandable, usable metrics.
They focus people’s attention on things that matter
Information overload in fighter pilots has been known about for many years but although it is less exciting, it is also a thing with executives and managers.
People get into a situation where they simply have too much information.
You can often see this when managers are requesting more and more information, trying to make sense of what is going on, hoping that if they get more information, delivered and cut and diced in different ways, they will somehow suddenly develop some insight.
They get people to think about things that they can affect
KPIs should be related to a lever that can be pulled that will make a real difference to the way the business is working.
A good example here is choosing office rent as a KPI.
Rent is usually controlled by a lease and doesn’t have any operational impact on a business so there aren’t any levers that can be pulled and even if there were, it wouldn’t make a difference anyway.
Alternatively, a company might identify website conversion rate as a KPI. The better you convert website visitors into subscribers the more money you make and you can affect this by changing the copy, layout and format of your website.
They help with organisational communication and understanding
Not everyone is a finance professional but for a business to be successful, everyone has to be involved in the conversation.
KPIs make information understandable and mean that complex concepts can be quickly understood and communicated.
They help people coalesce around a goal
KPIs should be related to the goal of the organisation so that the things you are measuring will make a real difference to the likelihood of achieving it.
Being able to get an entire business focused on meeting KPI targets and improving performance means that everyone is pulling in the same direction and all staff and contractors understand what they are trying to do.
They make sure decision making is based on data and not gut feeling
Too often in businesses, executives make decisions on hunches or on incomplete information.
KPIs ensure that everyone has the same access to information and one version of the truth.
When people make decisions with KPIs it is based on data that is accurate and relevant to the business, leading to better outcomes.
How do you decide on your own KPIs?
As we noted earlier, KPIs are a very personal thing for every organisation.
But there are some principles you can apply when you are choosing yours.
- Relate them to your organisational goals – if they don’t help you to achieve your goals then they aren’t a KPI
- Remember they are ‘key’ – if everything is important then nothing is important, so make sure you only choose 6-10 metrics.
- Identify what success looks like – what would make your KPI turn green, and what would be red?
- Make sure there is a lever attached – if you can’t make any change as a result of knowing what the KPI is then it isn’t a KPI
- Make sure it is measurable – A KPI is a data measurement and not a feeling
- Ensure you can access the data – if the data isn’t available in a timely manner, then it is likely to be useless as a KPI
- Make sure it is enduring – a KPI isn’t just for one or two months, it has to remain relevant in the future.
Once you have chosen your KPIs, don’t lock them up in a cupboard. They are most useful when the whole organisation is working towards them.
Can software help with KPIs?
So if you have decided that measuring your KPIs is right for your organisation then how can you set about measuring them?
The traditional way and the one that most people use in our experience is to export data into Excel and then use that to produce some form of reporting. Often this will use graphing and dashboard to put KPI information into an accessible format.
However, there are drawbacks to this approach, not least the need to set up and maintain what can often become a very complex set of formulas and graphs.
We often find that companies get to a certain stage in their development and they start to suffer ‘death by spreadsheet’ where they have almost every part of the reporting and analysis in a multitude of spreadsheets spread around tens if not hundreds of folders on their drive.
Our advice here is always to use the systems you have to produce your reporting where you can and this goes doubly for KPIs.
The good news is that most modern cloud systems such as Xero already have reporting built-in so all it takes is to tweak them to your own requirements.
Now we appreciate that this may be a bit tricky, especially if you haven’t used Xero before or where you just don’t have the time but don’t worry, give us a call and we’ll be happy to help.
Managing your KPI’s on your accounting system has a lot of advantages including;
- Less effort – it is simply much quicker to produce them straight from the system
- Speed – if you work it right then your KPI dashboard can almost be real-time
- Accuracy – the numbers are the numbers
- Security – exporting, putting in formulas and then distributing all introduce the chance of errors through fat finger syndrome
- Ease of distribution – you can share people in rather than sending documents out over email
- Cost- you are already paying for them so why buy more systems?
- Version control – never know what spreadsheet is the latest? With KPIs direct from your system, they are always the latest
So you can see that with a well configured, up to date accounting system you can be reporting your KPIs in no time at all.
Some examples of KPIs
Remember that KPIs should be personal to your organisation, so don’t think that by presenting this list we are saying that you absolutely have to use them.
Instead, these are simply ideas of things that other people have found useful in the past and hopefully, they will stimulate a discussion in your company.
The whole point of being in business is to make a profit and it would be obvious to add in profitability KPIs but beware. A simple profit KPI isn’t likely to be a good choice because you can’t directly affect it. Instead, it is more likely to be a function of lots of other KPIs.
However you can include things like product profitability, customer lifetime profitability, return on capital invested or profitability by channel.
Cost KPIs are often much more relevant in retail, process and manufacturing type environments.
Typically the cost of sales, labour costs, profit/expenses, non-direct expenses and costs per sq metre will work here.
If you are in a people business then KPIs from this section can’t be ignored. In fact, we’d argue that any business should have some people KPIs.
You may choose things like internal promotions, length of service, sick days, net promoter score, staff survey rating or training time.
Naturally, every business needs to have a handle on how well it is attracting, retaining and serving its customers.
Typical metrics here could be customer churn, acquisition rate, satisfaction rate, net promoter score, cost of acquistion or lifetime value.
Marketing can be the main driver in an organisation so it would be rare for a set of KPIs not to have at least some marketing metrics.
These can include customer cost of acquisition, cost per lead, conversion rate, rebuy rate, time as a customer, net promoter score and marketing ROI.
Process metrics really deal with the operational efficiency of a business.
They can include things like defect rate, cost of inputs per unit, line downtime, total cost per unit and waste percentage.
KPIs can work for your business
Most medium and large businesses will use some version of KPIs and they don’t have to be confined to an organisational level.
You can implement a ‘tree’ of KPIs with relevant metrics at a departmental or entity level and then cascade these upwards to give a whole company view.
The important thing to stress is that if it works for your business, gives you greater insight and allows your managers to make better, more timely decisions then it is the right KPI.
We know that when you first come to the issue of KPIs it can be a difficult subject, especially when you are really close to the business.
We’d always suggest getting someone in with the experience of setting KPIs and who can act as a critical friend, providing challenge and insight.
If you need someone to help with this then call us now and let’s set up a call to talk over the issue.