AUTHOR: Leigh Risbey
Imagine driving a car that had no speedometer, fuel gauge, temperature gauges, indicator lamps or warning lights!
This would be a car from the 1800s when motor cars first became available. The driver of such a contraption needed to have some knowledge of the engine and what it did. They also had to have an intuitive feel for the effects of over-revving, and how to judge speed from the sound of the engine.
As vehicles became more mainstream and were used by those with little interest in the mechanics of the motorised carriage, clear instrumentation became essential to show the driver actual speed, fuel levels, temperatures and the like.
Businesses are no different.
A business run on intuition may be fun, agile and exciting, but what happens when something goes wrong and is undetected? This could be sales enquiries dropping, cash running out, value per transaction reducing – or the reverse: sales go through the roof, production or supply chain can’t keep up, cash cannot sustain the demand, and the debtors list grows!!
Wouldn’t it be easier if we knew what the key indicators were in the business? Instead of trying to be across every transactional process, what if we had a regularly displayed set of indicators to highlight the health and performance of our business??
Welcome to Key Performance Indicators (KPIs) and Dashboards.
You don’t have to be a mechanic to drive a car and you don’t have to have a Masters in Business to run a business. What you do need to know is; what are the critical measurement points and what do they mean?!
KPIs come in any shape or size and not one size fits all businesses, but there are some common ones that help most businesses keep an eye on how things are going.
Firstly, it is essential to know the critical points in the process of doing business, for your business.
These might be:
- Sales enquiries/Sales – conversion of enquiry to sale
- Footfall per day – retail measurement of interest in the store and potential to sell
- Footfall per sales transaction
- Average value of sale per transaction
- Average cost of sale per transaction
- Stock turns – how frequently you are turning over your stock – value and volume
- This may also need to be measured by line item or ranked in value per item
- Debtor days – how long are you waiting for your money?
- Creditor days – how quickly are you paying your bills?
Others can be more operationally focused:
- Hours paid per hours billed – billable hours
- Time to complete a task – this may be repairs and maintenance or manufacturing oriented
- Time to answer a phone – call centres use many KPIs to gauge performance
- Dropped/Unanswered calls
- Kilometres per hour – this can be used in many industries
- Tonnes per day/hour
- Uptime of equipment
The list can be endless and some companies fall into the trap of trying to measure everything. This leads to so much reporting that we become ‘data blind’. Too much information can really be a bad thing when managing a business through a dashboard approach.
This is where Red Flags come in. Having an abundance of measurements is not a bad thing as long as we focus on the key ones. We identify those we need to know and over what period of time; the rest have set points that alert us in the event they go amiss.
Let me explain – a small manufacturing business could have hundreds of daily measurement points and it is impossible to meaningfully use this information efficiently and effectively.
Consequently, we need to identify from the measurement points which ones are critical for the size and complexity of the business. Within reason we should be able to identify no more than 10 key measures that we look for each day or maybe even weekly.
The rest of the measures, provided they are outputs of meaningful inputs (we can explain this more if required, please call us) can still be captured and automatically monitored in the background. We will only be alerted if they reach certain pre-set points. Often, even the automatic alerts can be done without, provided the Critical KPIs are designed to alert our attention.
For Example:
A critical daily KPI in a business effectively selling time may be the hours they buy from their employees versus the hours they sell to their customers.
The daily measure is expected to be 90% of paid time is chargeable to the customer – this allows for some travel time and paid breaks. This is our median target level.
The measure on one day comes back at 80% – this may not seem like much initially, until we recognise that the margin on this type of transaction is only 10%. This means that the margin has been eroded for that day and there is a risk of loss to the business.
The alert is raised and from this one daily measure we can quickly investigate the cause through more analysis of the background numbers. We can determine if this is a one-off, perhaps due to paid training taking place, or if there is an endemic problem that is becoming apparent. Perhaps the loss of a regular customer has reduced the amount of billable hours and we were not aware of this.
The variance from the target gives us reason to look deeper and resolve the problem before it is too late. Imagine if we did not become aware of an issue until the end of a month or at the end of a billing cycle: the loss compounds daily until it is revealed in the monthly financial results – and that is assuming that we check our Profit &Loss (P&L) position monthly and we know what to expect when we do!
There are many examples of one measure being the result of multiple measurements, which will in turn highlight a variance. The most common one is probably the margin or profit of a business. Sadly, by the time some businesses see the results of their efforts it is too late to respond. Reactions may ensue which invariably end in more financial pain than was necessary.
Setting up and using KPIs does not have to be overwhelming and does not call for expensive software that draws pretty diagrams and graphs – although that is nice to have!
KPIs can simply be a set of numbers regularly presented against an expected level of performance. Your preferences for reviewing information will determine how this gets presented. If you want others to be responsible for monitoring their own set of KPIs, visual presentation is generally the best way to go.
Finally, it is worth mentioning that KPIs can change over time. What is right for a small business won’t necessarily work for a medium to large business and similarly what works in some sectors may not be so effective in others – you don’t need to know how many tonnes of clothes your fashion retail stores sell per day, but it would be worth knowing how many people came into your stores and of those how many spent money!
We can help you identify the best KPIs for your business, set them up and help you and your team interpret and use them to improve and support the operating rhythm any good business would want to have.
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