What are KPIs?
KPIs are Key Performance Indicators and as the name suggests, they are used to measure performance against a set of criteria over time.
They are often thought of as a business tool, but in reality any individual or organisation tracking progress in a given area will be using KPIs, from someone getting fit and tracking their stats on a mobile phone app., to a football coach measuring passes completed and tackles made.
For a KPI to be useful it needs to be measured both regularly and consistently, the data needs to be reviewed and interpreted, and finally the results need to drive an outcome.
How and when to measure them will depend on what is being measured and why. For example, if you are running a coffee shop, knowing your daily takings (the what) will help you decide which are the good days to open and when to take a day off (the why). However, daily sales for a large construction company will be meaningless, and their KPIs would look very different.
As the example above shows, there is no ‘one size fits all’ set of KPIs and identifying the ‘right’ ones for your business needs careful consideration.
The crucial first step is identifying the ‘why’; after all there’s no point investing valuable resources on pointless exercises. Arguably the most important measure in any business is profitability and most will record this, usually on a monthly basis. But what turns profit from the number at the end of a column of figures into a KPI is:
- Measuring it against a pre-determined standard (in this case budgeted or forecast profit)
- Tracking it over time (eg monthly)
- Reviewing the results (did we hit target; how much under/over; changes from one period to the next)
- Interpreting those results (why was budget missed/exceeded; how are we performing over time; is there an issue that needs to be identified)
Measuring profit is a good start but to truly understand the dynamics of your business you need to really get under the skin of what it is that drives it, and the larger the organisation the more numerous and varied these drivers become. However, for all businesses the basics are the same:
Sales – Cost of sales – Overheads = Profit
Increasing sales and reducing costs will inevitably increase profit. But to understand them properly, each of these areas needs to be dissected into smaller components. Crucially, it is not just the numbers themselves that are important, but what lies behind the numbers as well. This is where the analysis comes in. The following are some examples
To make a sale you need a customer that wants to buy what you are selling for the price you are selling it at; to get a customer you need some marketing. KPIs around sales could include
- Number & value of customers won/lost
- Marketing activity
- Sales leads to customer conversion ratio
- Number & nature of customer complaints received
- Units of product lines sold – the sales mix
So if your KPIs reveal a sudden spike in customer complaints and an issue with customer retention, steps can be taken to rectify the situation.
If on the other hand your number of pay-per clicks has increased and new orders are following suit, you marketing strategy would appear to be paying dividends.
Cost of sales
This is what it costs the business to get its product or service out to its customers. It’s the buying in of stock, the conversion of goods into product, or the time/cost to deliver a service. KPIs in this area could include
- Rate of product losses or deterioration
- Hours paid to staff v hours billed to clients
- Machine running time v down time
- Budgeted hours to complete a task v actual hours taken
- Budgeted sales mix v actual – where different product lines have different costs
One outcome could be an increase in production time, the result of which is delays in orders and a drop-off in sales. The reasons behind this could be anything from poor staff training to problems with suppliers to faulty machinery. To get to the root of the problem it might be necessary to devise further, more detailed KPIs around the production process.
These are the general costs of running the business and controlling these can be vital to whether or not you turn a profit. A significant overhead in many organisations is staffing costs. KPIs in this area could include things like rates of staff absenteeism or overtime payments.
Building a KPI matrix from may seem like a daunting task, but by breaking the business down into its constituent parts, and then breaking these parts down even further, you will not only make the process more manageable, but also make the outcomes more meaningful. After all, small improvements in many areas can make a huge difference to overall performance.
Be clear about your objectives – whether it’s more sales, less time in the office or a specific problem that needs to be fixed, you need to know what it is your trying to achieve.
Be disciplined – for the results to be meaningful they must be recorded consistently and accurately over time.
Finally review, interpret and react, even if it is just to reassure yourself that everything is on track.