Use Measurements to Improve Profits
September 24, 2020
Businesses of any size can use measurements (KPIs or key performance indicators) to improve operations and, ultimately, net profit. Key measurements can and should be used to assist in operational analysis and, ultimately, drive business improvements. It is a must for business owners and managers to understand performance on both a company-wide level and "drilling down" to various products, services, divisions, departments, branches, etc.
Although there can be an almost infinite number of performance indicators 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 performance indicators might be for:
- Revenue
- Expenses
- Cost of goods
- Website traffic
- Results of specific marketing programs
- Customer retention or customer loss
- Product returns
- Quality control
- Employee turnover
- Receivable collections
- Customer complaints
Even though each business is unique, there are some general guidelines that can be applied in selecting which performance indicators to use.
1. Don’t Get Overwhelmed
As with any metric, data point, financial ratio, or other form of measurement, it is important to use measurements that are most important to the business. When owners or managers are overwhelmed with too many indicators, the importance of each can easily be diminished. Concentration should be placed on the most important indicators that can help drive a business forward in an effort to achieve its strategic goals rather than on a multitude of indicators that might not be truly useful.
2. Relevance Counts
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 indicators that are quantifiable and timely can lead a business to higher levels of performance. The indicators chosen must be applicable to the specific goals of the business rather than selecting indicators that have no relationship to goal achievement.
3. Must Be Understandable
Too often indicators measure only financial performance. While these are important drivers of a business, financial indicators are often confusing and irrelevant to non-financial owners and managers. Management at all levels in a business must be able to understand the majority of indicators so they become most meaningful. A careful selection of indicators 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 the particular function being measured.
4. Data Must Be Valid
The underlying data used to compute an indicator 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. Time on the front-end in deciding what data will be used will save time on the back-end after it is discovered that, perhaps, the data was either flawed or not the right data to use in the first place.
5. Performance Must Be Controllable
The analysis of measurement indicators can drive improved performance but only if performance and changes can be controlled by the person in charge of the particular item being measured. Indicators lose importance if factors are measured in a business but changes within the effected area are never made to improve performance.
Measure What's Important
Measuring performance that does not align with the goals of a business produces no useful results. If time is taken to compute and analyze various indicators, then there should be sufficient consideration to ensure that the measurements used will benefit the business in terms of meeting both short-term and long-term goals.
