Sunday, October 07, 2012

What KPIs Drive Your Business?

In challenging times it's essential to manage your business operations to thrive. Probably the easiest way to do this is to focus on expanding more profitable aspects of your business whilst containing costs. You can do this by making it easy for your team to focus on your game plan by exposing your Key Performance Indicators (KPIs).

What KPIs do you use to manage your business? Every business is different, but as an example, the following is Axsapt's Dashboard.

Axsapt's Dashboard displayed on an LCD screen in our office
Displayed on a large LCD screen in our office, the Axsapt Dashboard shows a Leaderboard of revenue generated by all Team Members with Targets required to stay profitable. As we are a service based organisation, our help desk issues and performance are tracked so we can focus on improving the time it takes to help customers solve issues. Also measured are future appointments as they help improve customer satisfaction and revenue.

There are a selection of possible measurements that rate the financial fitness of any business and other non-financial KPIs, whilst not as well known, are even more valuable in predicting future cash flow and profitability.

The knee jerk reaction when times are tough is to slash variable costs (wages, marketing, staff amenities etc) and increase short term profits. Financial-based Key Performance Indicators (KPIs) are useful for highlighting the following:
  • Cash position (ability to meet wages, rent and other fixed costs)
  • Sales
  • Gross Margin
  • Expenses
  • Net Profits
  • Unpaid customer invoices exceeding trading terms
  • The net value (assets less liabilities) of the business 
Financial KPIs are typically compared to budgets or equivalent periods in the past with the intention of establishing a trend line to highlight potential problems.

Although useful, there is a limit to the overall usefulness of Financial KPIs in managing your business. There are 2 fundamental weaknesses of financial reports:
  1. unless you are an accountant, financial metrics are difficult to understand, and 
  2. financials provide you with limited guidance in how you can tweak your business to make it better.
Financials are ok at alerting you to potential problems that you can address before it's too late. For example customer outstandings exceeding trading terms pinpoints customers struggling financially. It's important to deal with problems like credit control, but it's even more important to focus on increasing opportunities and improving activities that improve customer satisfaction.

KPIs that track Sales, Outstanding Debtors, Stock on Hand are “lagging” indicators. "Predictive KPIs"* on the other hand are “theories” that predict performance. They work because they focus you and your team on the reason why your business exists in the first place.

What KPIs should you choose to help your business?

It’s difficult to generalise, but the following are fairly common KPIs in helping to catch problems before they can cripple your business:

  • Velocity, or how long from the time an order is received to the time you deliver your product or service
  • Number of new products taken on each year and on sold to existing and new Customers
  • Customer Satisfaction (measured by surveys, product returns, sales activity etc)
  • Staff Satisfaction (measured by surveys, staff reviews etc)

Our tip is to focus on no more than 3 KPIs and automate and display them on a big LCD screen in your office for all to see.

More information: Axsapt

*Source: The concept of Predictive Key Predictive Indicators and focusing on opportunities is sourced from the books:  "Implementing Value Pricing" and Mind over Matter, both by Ronald J. Baker

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