Use KPIs to Improve the Bottom Line
August 23, 2016
KPIs...key performance indicators. Large companies use KPIs consistently to assist in operational analysis and, ultimately, drive business improvements. Small companies and SMEs can do the same. It is a must for businesses to understand performance on both a company-wide level and "drilling down" to various divisions or departments.
Although there can be an almost infinite number of KPIs to review, a business must concentrate on those indicators that are most relevant to the business in terms of increasing profits and creating long-term value. Examples of KPIs might be for:
• Web traffic
• Income and expenses
• Specific marketing programs
• Cost of goods
• Customer retention
• Product returns
• Employee turnover
Even though each business is unique, five general guidelines can be applied in selecting KPIs to use.
1. Less Rather Than More
As with any metric, data point, financial ratio, or other form of measurement, it is important to have less rather than more. When owners or managers are overwhelmed with too many KPIs, the importance of each is diminished. Concentration should be placed on those indicators that can help drive a business forward in an effort to achieve its strategic goals. KPIs chosen must be applicable to the specific business, division, or department rather than selecting KPIs that have no relationship to goal achievement.
2. More Than General Performance
Measurement is good; however, the most important types of measurement are those that measure specific performance in relation to business goals. Achieving success is what produces long-term sustainability and increased value for a business. Relevant KPIs are quantifiable and timely that can lead a business to higher levels of performance.
3. Must Be Understandable
Too often KPIs measure only financial performance. While these are important drivers of a business, financial KPIs are often confusing and irrelevant to non-financial managers. Members at all levels in a business must be able to understand the majority of KPIs to make them most meaningful. A careful selection of KPIs is important for them to be useful; therefore, they must be well defined and explained through proper communication to everyone in the business associated with a particular KPI.
4. Data Must Be Valid
The underlying data used to compute a KPI must be valid. If the data used is flawed, outdated, or not reliable for any reason, then the data yielded will be equally flawed and, thus, invalid.
5. Performance Must Be Controllable
The analysis of KPIs can drive improved performance but only if performance and changes can be controlled by the person selecting and analyzing the KPIs. KPIs lose importance when a manager who has responsibility for certain KPIs cannot control changes within his or her area to affect needed changes.
Measure What's Important
Measuring performance that does not align with a business' goals produces no useful results. If time is taken to compute and analyze KPIs, then there should be sufficient consideration to ensure that the KPIs used will benefit the business in terms of meeting both short-term and long-term goals.