A Beginner’s Guide to Key Performance Indicators
Posted on 17th August 2017 in Advisory
Written by Freya Hughes
All business owners should be measuring Key Performance Indicators. They’re a great way of keeping up with the inner workings of your business, and give you a snapshot of where your business stands. You’ve got a business plan, and KPIs are what you use to measure the success factors that drive your plan. For many, they’re the metrics that determine success, so are a crucial part of running their business. We are aware that while you might have had some dealings with KPIs, they’re not always easy to choose. In this blog, we’ll explore what KPIs actually are, how to choose the perfect ones for your business and why they’re so fundamental to business operations.
A Key Performance Indicator is a quantifiable measure a company uses to determine how well it meets the set operational and strategic goals. Think of them as a breakdown of your overall business goals; choose which aspects to measure, and keep tabs on the direction your business is taking. Breaking down your targets into KPIs makes them far more manageable, as looking at the business as a whole can be overwhelming.
Use KPIs to your advantage – you can allocate them to each department of your business and have your managers monitor them. They can be financial or non-financial, so every variable can be looked at.
Choose the right KPIs for you
If you need some inspiration, have a look at our KPI Library which is fully-stocked with different industry-specific examples and how to calculate them. We’ve also elaborated on these with our compact lists of KPIs for different industries.
Now you’ve had a look at some examples, let’s explore how to pick the best KPIs for your business. The key aspect, says Remarkable Practice MD Paul Shrimpling, is to choose metrics which directly affect your customers. For example, a taxi company should look at time taken to respond to the call, time taken to arrive at pick up point, and similar.
These variables affect your customer retention: take longer than expected to pick up a customer and they’ll probably go to another company for their next ride. This will affect your bottom line, as you’d be indirectly passing up their fare. Reputation is everything in a customer-facing business, so don’t risk yours. Measuring these example KPIs means you’ll be able to identify where your business is, and isn’t, hitting the mark.
Types of KPI
Xero state that there are four key areas to measure when choosing your KPIs. These are:
Thinking about your business, have you taken these areas into account recently? They more or less tie into each other, you’ll notice particularly without efficiency you’ll struggle to achieve the others. Bear these in mind while selecting your KPIs.
“Where Xero ends, FUTRLI starts. FUTRLI is providing the ability to look at your Xero data in a far more informative way. You can do cancellations, non-financial data that you can bring in – which again makes your Xero data work harder for you, therefore make better decisions as a business person.”
Ian measures such real estate KPIs as commission, amount of properties advertised by agents, the number of days a property is on the market, and the different percentage of asking price compared to selling price. As you can see, these aspects of his business could, if they’re negative results, affect Ian’s bottom line.
Drill into your figures
Departmental KPIs, to continue with the taxi company example, are beneficial for any business with more than one department. Dividing up what you’re measuring will allow you, the business owner, to keep control of every aspect of your business. You’ll be able to manage your team based on factual data, so you (or your managers) can start to guide employees effectively, identifying where they might need more training.
We spoke to tourist attraction Crystal Castle, Australia, recently about how owner Naren King is able to live in Bali while keeping tabs on his business. They have three main revenue streams: cafe, entry fee and retail.
His team of 60 all work towards the same goals, as the managers lead meetings with their KPI results for a given period. Tracking his main revenue streams allows him to log in to FUTRLI and ascertain how well each department is performing, with a few clicks, remotely. With managers leading with their key metrics, each employee understands their responsibility to the business’ bottom line.
Look ahead to success
Hopefully by now you understand that KPIs can be used flexibly. While tracking your business’ movements, you can also look ahead. It’s great to look at your results, but much more beneficial to manage the activity and effectiveness that drive those results. For example, you’ve got your non-financial data and need to calculate how effective this data is to push your business forwards.
Speaking to Skunkworks Surf Co, we discovered how crucial to their operations measuring KPIs is. Office Manager and Bookkeeper, Samantha Quinn, told us:
“Keeping on top of your KPIs is a solid way of ensuring you’re on the right path. When you’ve identified the relevant ones, make sure that they are measured within FUTRLI as it makes it all a lot easier.”
The company creates a new breed of surfboards, having realised the ones on the market weren’t hardwearing enough. They’re innovators in their field, based in Northern Ireland, and needed to keep a handle on the manufacturing company.
Owner Ricky has a surf school too, so running two businesses simultaneously would be impossible without KPIs. Manufacturing companies must track KPIs like their reject/scrap materials, staff training time, their backorders percentage and labour costs. Any additional KPIs would be specific to that company.
Keeping your team onside and working as a unit is fundamental. The educational impact of monitoring KPIs is undeniable: your staff are going to learn a lot about your business, and thoroughly understand why their work is so important to your company. Employees will become more efficient, as job satisfaction often increases when people are appreciated and can meet targets as a team.
The data being generated by KPI management often leads to constructive conversations within the team, who will start asking how they can meet targets quicker, or even beat them. This is the dream! Use the information to manage employee progress and provide feedback and the workforce will improve their productivity.
Some metrics will prove important to one business, it does not mean they’ll be significant in yours. Every business is different, therefore every business will have different goals – even if they are your most direct competitor.
Measuring KPIs that aren’t tailored to your business may lead you along the wrong path and mean the end of your business venture. We know margins are tight for most, so seek professional help from your accountant if you’re unsure.
The real-time data that KPI measurements provide allows you to make adjustments to your operation throughout the year. This is a huge benefit, as you’ll be able to identify issues as they happen – sometimes even before they happen. It’s like being alerted to your car running out of petrol: when the light comes on your dashboard, you need to take action. That is the point of measuring KPIs – take action before it’s too late.
When it comes to your P&L at the end of the quarter or year, you’ll feel more connected to the figures. Measuring KPIs will prepare you for the eventuality of dealing with your P&L, saving you time, pressure and stress and the end of the given fiscal period.
If you think you’re ready, read how to create the perfect KPI dashboard for your business…