Richard Pittelkow – Organizations measure Key Performance Indicators, or KPIs, to help define and measure those things that drive the success of their business. For the small business owner, defining and measuring the right KPIs and developing action items from the data can help ensure their business will be successful. Whichever KPIs are selected, they must reflect the organization’s goals, they must be key to its success, and they must be quantifiable (measureable)
A KPI report, sometimes referred to as a Dashboard, provides a snapshot of the important areas of a business’s operation. Think of the dashboard on a car. A car’s dashboard displays all of the vital information a driver needs right at his/her fingertips. To the small business owner every area seems important, but a properly established KPI report gives information on the make or break areas of a business. The small business owner should measure and report on the areas of the business that give it a competitive advantage over similar businesses and that will make it successful. Not every area warrants such scrutiny for every business. Determine those areas that hold the key to the success or failure of your business and provide vital decision-making information.
Develop Your KPI Dashboard
1. Choose the areas and numbers that indicate the health and trends of your business. These numbers will give you a Dashboard to track what is going well and what needs improvement. Many things are measurable. That does not make all of them key to the organization’s success. In selecting KPIs, it is critical to limit them to those factors that are essential to the company reaching its goals. It is also important to keep the number of KPIs small enough to keep everyone’s attention focused on them. Potential monthly (or weekly) KPIs to choose from for your Dashboard:
• Number of sales for each sales category
• Average dollars per sale for each sales category
• Sales dollars for each category and total sales of all categories
• Operating expenses as a percent of total sales dollars
• Number of new customers
• Number of repeat customers
• Number of FTE personnel
• Personnel hours
• Personnel expense as a percentage of sales
• Units produced
• Sales compared to Budget
• Expenses compared to Budget
• Profitability compared to Budget
• Product returns
• Cash flow analysis
• Cash in checking account
• Number of hits on the business’s website
2. Determine goals for each KPI.
• Start-up businesses should utilize the goals that are contained in the projected financials of their business plan.
• Established businesses should utilize the goals that are critical to achieving their monthly and yearly budgets.
• The goal for each KPI should be measurable and not subjective.
Monitor Your KPI Dashboard
1. Calculate and review your KPIs at least monthly.
• Track comparative numbers to determine trends; i.e., all months next to each other on a single sheet of paper for each KPI category. Without this type of comparison, you cannot see if you are improving or deteriorating in that category.
• Learn and utilize the tools in your accounting software such as QuickBooks that may automatically calculate some of the KPIs you want to track.
• It is important to stay with the same definition for each KPI category or the numbers will not be comparable. For example, will cash flow take into account capital expenditures or just operational cash flow?
2. Develop action plans for each area that needs improvement.
• Just tracking the numbers is not enough – you should develop an action plan for improving those areas that are not hitting their goal. Unless this is done, you are missing the power of having KPIs at all.
• If improvement is not being achieved or goals are not being met, review your action plans for possible adjustment.
Good KPIs versus Bad KPIs
• Title of KPI: Increase Sales
• Defined: Change in Sales volume from month to month
• Measured: Total Sales
• Target: Increase each month
What’s missing? Does this KPI measure increases in sales volume by dollars or units? If by dollars, does it measure list price or sales price? Are returns considered? How much, by percentage or dollars or units, do we want to increase sales volumes each month?
• Title of KPI: Percent Monthly Increase in Total Gross (before returns) Sales Dollars. List prices are not considered.
• Defined: Month’s Total Gross Sales Dollars minus previous month’s Total Gross Sales Dollars, and that total divided by the previous month’s Total Gross Sales Dollars. The resulting number shall be expressed as a percentage.
• Measured: Total Sales combined for all Regions
• Target: 20% increase month over month for January through June, 10% increase July forward.
If the KPI Dashboard has been developed thoughtfully and strategies are developed for improvement where needed, it will help ensure the small business owner will be successful.
Richard Pittelkow is a Business Advisor for the West Central Indiana Small Business Development Center, an organization with the mission to create a positive and measurable impact on the formation, growth, and sustainability of Indiana’s small businesses by providing entrepreneurs expert guidance and a comprehensive network of resources. Richard can be reached at [email protected].