Measuring Performance

Your car's dashboard contains a number of different gauges designed to alert you to potential problems with your vehicle. Have you ever thought that you have similar gauges that will alert you to potential problems in your business? These gauges can be referred to as key performance indicators or KPIs for short.

Paul Sparkes, product director at Iris Exchequer, defines it well,"KPIs are quantifiable measurements of business performance commonly used to evaluate activities that reflect the critical factors of business success." He urges business to proactively monitor KPIs otherwise they leave themselves vulnerable to problems that can undermine performance and profitability.

"Running a business successfully is all about looking at trends and the big picture, and then being able to react quickly. KPIs are a vital tool in that process."," adds author Roger Harrop, author of  ‘Staying in the Helicopter - the key to profitable growth.' 

KPIs Should Be Unique 

To reach your strategic goals you need to define, measure and track the KPIs that make your business unique. No two organisations' KPIs will be exactly the same – you must define and interpret your company's KPIs relative to your goals and objectives.

Experts say that to be effective KPIs must be specific and measurable. It is also important to be able to measure them to a benchmark, whether this is a previous performance period for your own company or your industry peers. For example, if the time taken to resolve customer complaints has reduced from the same quarter a year ago your levels of service are probably improving. Similarly, you could benchmark your company's numbers against your industry's average performance or your industry's 75th percentile (equal to or better than 75% of the businesses in that industry) performance.

Financial and Non Financial KPIs

There are two broad categories of  KPIs: financial and non-financial. Financial KPIs common metrics such as return on sales, gross margin and working capital as a percentage of a sales.  Non-financial KPIs may include quality and customer satisfaction measurements, employee turnover and response and conversion rates for marketing and advertising campaigns.

It is easy to get caught up in trying to decide which KPIs to track and measure and lose sight of what is really important so it is important that KPIs always be linked back to your company's strategic goals. Try to build your KPIs into your business processes and automate them whenever possible so you can spend more time focused on using the information that is generated to tweak your actions and meet your goals and objectives.

Take a Step Back

Deciding which KPIs are the most important ones to focus on can become daunting, often stopping business owners from getting started. It is not unusual for managers to be too close to the situation to see which KPIs are the critical indicators for the business. Therefore, it is sometimes beneficial to take a step back and view the organisation from afar.

Just as being able to interpret the gauges on your car's dashboard  is an essential part of operating your vehicle, accurately reading the KPIs for your company is indispensable to its survival and success.