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Key Performance Indicators: The business dashboard for success - Jul 30, 2009

Posted by: Lynn Keith Fetterman in Articles

Why use Key Performance Indicators?

Most of us would not think of driving a car without knowing the gas level, the speed we are driving or the temperature of the car's engine. This is important information, particularly if we have a desired destination and critical time of arrival in mind. Yet why do many businesses operate without metrics or key performance indicators ( KPI's) that tell them if they are on course to achieve their goals, plans, and objectives.

KPI's are used to monitor both financial and non financial activities, processes and financial results. In addition, KPI's provide a standardized way to clearly communicate to the organization what is important and where the focus should be on a regular basis. This could be daily, weekly or monthly performance monitoring depending on the need. Another important contribution that KPI's make is to provide a tracking system that can move an organization toward continuous improvement.

Examples on some basic KPI's

But what KPI's should a use to track performance? That question is simply answered by asking what is critical to the success, growth and the profitability of the business? The process is easier when the business has a documented plan that clearly defines the business goals and the course of action that will be taken to achieve certain sales, profit and operational goals.

Some examples of financial KPI's could be the tracking of financial ratios. Solvency ratios will help determine ability to pay suppliers, which is critical if a business expects sales growth and to provide a high level of customer service. One example of a solvency ratio is the "Quick Ratio", which simply is cash plus accounts receivable divided by current liabilities. In this case the goal would be to be above 1.0 and trending up rather than down. Tracking this could provide an indication of cash flow problems on the horizon. This could be presented graphically to show trends, with comparisons to prior months and prior years. Another graphic KPI presentation would be to show the current month to a budget or plan goal.

Every business should understand gross profitability trends in total or more specifically by product line, service offered or by customer. By product is important as it helps to explain why the total gross profit margin is changing. Monitoring product volume, price and cost changes will explain how mix variances impact the overall gross profit margin.

Other KPI ratios can be used to track if the business is operating efficiently. In this case, tracking the days sales outstanding and inventory turnover would be good indicators of how the business is operating and controlling working capital. Again graphic presentations as outlined above with the quick ratio example would clearly show if trends are improving or deteriorating. There are many more financial indicators but for now let's look at the non financial KPI's.

To help determine the non financial KPI's just think about the activities that affect sales, profit and cash. As example, gaining new customers will impact sales growth. Therefore, tracking the net gain in new customers less known customers lost could be a good KPI for monitoring customer growth. Another sales growth KPI is tracking customer satisfaction levels. Customer satisfaction will be impacted by service level and tracking on time deliveries and order fill rates would be a nice tie into customer satisfaction. The loss of employees indirectly impacts profit due to the retraining of new employees and the cost of errors made while new employees are not fully trained. In this case, employee turnover rates could be a KPI. If the business is in a manufacturing industry, tracking production line efficiency along with scrap and waste would be a good KPI for monitoring better cost control. These are only a few of the many different types of KPI's that a business can monitor.

Summary

In summary, KPI's are the indicators that a business must track to look at trends and assure business activities are moving in the direction so sales and profit goals can be achieved

I have implemented many KPI tracking systems over the course off many years and I have found that tying KPI's to employee incentives and performance is a valuable way to ensure that employees are controlling the activities that determine success. This also ensures that employees have a common and clear understanding of the areas that are important for continuous improvement. Installing a KPI system also could make the bank happy as it demonstrates a high level of operational control and discipline. In conclusion, use KPI's so the business will have a greater chance for success.