Why Are Key Performance Indicators Important?
Are you tracking Key Performance Indicators for your business?
Why are Key Performance Indicators important? How can Key Performance Indicators grow my business?
There are no standard Key Performance Indicators to measure company performance. By setting measurable company goals, you can effectively use Key Performance Indicators to help grow your business strategically.
Key Performance Indicators (KPIs) are metrics that provide a quantitative measurement of your company’s performance over time.
They should act as a “flash” report, giving you a quick understanding of how your business is progressing, or can be expected to perform in the near future.
The main idea is to have a few key measurements that help you track critical components of your business. Financial statements just aren’t enough. KPIs should be more “big picture,” taking into consideration your Personal Vision and the company’s goals.
A secondary benefit is to help educate your Board members about critical processes and results in your company.
The more they know about your business, the better advisors they can be to you. For this reason, KPIs should be “normalised,” which means expressing them in a way that is easily understood. For instance, if your finance company allows you a credit line based on 80% of the number and age of units in inventory, you would want to express this as “My credit line is 94.8% of the allowable limit,” as opposed to “My line is at $347,000 on a current inventory value of $458,000” which is difficult to interpret in terms of performance.
There are no “standard” KPIs.
Every company has a different driving force, so KPIs will vary from one to another. Sales and profits are numbers every business tracks, but they only tell you the results of your efforts. Because dollars are a universal method of measurement, it’s tempting to use them for KPIs. However, a KPI should be measured against something (e.g., sales against same month last year and against budget). A number is just data, but ratios provide information about how your business is performing in reality compared to expectations.
You may also track industry-related data, such as oil prices, but remember that industry indicators don’t measure your performance.
Your metrics should illustrate how you are doing, not how your industry is doing.
By way of example, here is some “KPI Logic” from members of our Board:
- I want to bring on “x” partners in the next three years. Each partner must be supported by $”y” revenue, and my average new account is $”z” annually. My KPI is the number of new accounts opened in the last month and for the year to date.
- If we have more than an “x” week backlog, we begin to miss deadlines due to over commitment, but less than “y” weeks results in under utilised personnel. My KPI is the number of weeks of backlog against the over/under optimum range.
- We are growing rapidly, and it is difficult to track the productivity of new hires. My KPI is dollars of revenue per field technician.
Once you start using KPIs, you’ll be able to track your company’s performance over time in a way that can be easily understood by your management team, as well as employees, Board members, potential partners, etc. Just remember, nothing is forever – if you find that a KPI is not giving you actionable information or is no longer relevant, get rid of it.
This Key Performance Indicator whitepaper will:
- Define key performance indicators and discuss why they are important.
- Discuss how KPIs can help grow your business.
- Set guidelines for what KPIs you should track based on your company’s goals.