There was a time when cars didn’t have a fuel gauge. That meant you had to understand the size of your fuel tank, remember when you last bought fuel (and how much) and estimate the distance you’ve travelled since filling up.
None of that is particularly hard, but, depending on your risk appetite, you may be worrying and constantly filling up to ensure you have enough fuel. Of course, you may also get it wrong ... and run out of fuel.
Whatever the case, you may feel stress and spend time doing calculations. That takes you away from something else you could do, like focusing on driving, car maintenance or talking with your passengers. I’m grateful we have fuel gauges in cars now!
What is the equivalent of the fuel gauge in your business? Often called Key Performance Indicators (KPI’s), when you glance at the “dashboard of your business”, what do you see? And what don’t you see?
Let’s look at some best practices in KPI monitoring:
1) You probably need less than you think
Three or four important indicators can give you a strong sense of what you need to do. You can then drill into challenges and opportunities as you see fit.
2) What you measure depends on the goals of your business
If you have a strong orientation to revenue growth, you may want to measure how many leads you’re generating, where they are coming from and your sales conversion rates. You could look at this by product, by region or by sales team member.
If you have a strong profit orientation, you might look carefully at business expenses over time. Rather than measuring the absolute numbers for each expense, consider a category of expenses as a percentage of the total expenses. For example, if your marketing expenses are 10% of total expenses now but they used to be 15% of total expenses, that says you’re spending less on marketing (in relative terms). Perhaps you became more efficient or perhaps you need to spend more? You may want to drill into that question.
Perhaps your goals are around increasing efficiency, in which case you could measure the returns on your resources or assets. For example, in a services business, you might expect each account manager to invoice, say, $300,000 per annum. Some will ... and some won’t but having a read on this will be very useful.
3) KPI’s are best viewed in the context of time
How does today’s data compare with one month ago or one year ago? Where do you want to be in six months from now? Are you on track to achieve that?
4) Set things up properly in the beginning
It used to be extremely difficult to access all the data we want and include it in easy-to-read reports. Thankfully, this has become much easier and many tools exist to help us. But you still have to think carefully about what you want to see and when you want to see it. A lot of time can be wasted due to a lack of preparation in this regard.
5) Use meaningful metrics
Make sure the KPI’s are meaningful to as many team members as possible. You want people to be “living the KPI’s“. They should be easily accessible and people should get excited when there are positive developments. If they are seen as “some strange management activity“, it will be difficult to drive them in the right direction.
6) Be ready to evolve
The first KPI’s you define might not make sense as the business and market changes. Always challenge whether your approach can be improved.
7) Ask what decisions you might make based on the KPI’s
Most importantly perhaps, ask what decisions you might make based on the KPI’s. If revenue is declining but the number of leads is rising, what are you going to do? What about in the opposite case? If you can’t easily answer this, you may have the wrong KPI’s.
Need help building and using a business dashboard? Your accountants are uniquely positioned to help with this so please get in touch.