KPIs: The Keys To Profitability
Businesses of any size can use measurements (KPIs or key performance indicators) to improve operational efficiency and, ultimately, optimize profitability. Key measurements can and should be used to assist in operational analysis and, therefore, drive business improvement forward. It is a must for business owners and managers to understand performance on not only a top down analysis but also focusing more closely at various products, services, or departments company wide.
Although there can be an almost infinite number of KPIs to review, a business must focus on the indicators, which are most relevant to the business by way of increasing growth, improving operational efficiency, and optimizing profitability. A list of indicators may include but is not limited to:
Cost of Goods Sold
Results of specific marketing programs
Customer retention or customer loss
While specific indicators for each business is unique, there are some general guidelines you can use when determining which indicators may be most relevant with regard to your business’ operations.
1. Don’t Get Overwhelmed
As with any metric, data point, financial ratio, or other form of measurement, it is important to use measurements that are most relevant to the business. When either owners or managers incorporate too many indicators, the importance of each can be quickly diminished. In other words, concentration should be placed on the indicators that would reveal how to move the business forward. In doing so, the data from the specifically chosen indicators would provide the most value and achieve strategic goals for the business long-term, rather than the use of many indicators, which may not be entirely useful.
2. Relevance Counts
Measurement is great. However, the most important types of measurement are those that measure specific performance in relation to the goals of the business. Achieving success is what produces not only long-term sustainability but also increased value for a business. Relevant indicators that are quantifiable and timely can lead a business to higher levels of performance. The indicators chosen must be applicable to the specific goals of the business rather than selecting indicators that have no relationship to goal achievement.
3. Must Be Understandable
Too often indicators measure only financial performance. While these are important drivers of a business, financial indicators are often confusing and irrelevant to non-financial owners and managers. Management at all levels in a business must be able to understand the majority of indicators so they become most meaningful and actionable. A careful selection of indicators is important for them to be useful; therefore, they must be well-defined and explained through proper communication to everyone in the business associated with the particular function being measured.
4. Data Must Be Valid
The underlying data used to compute an indicator must be valid. If the data used is flawed, outdated, or not reliable for any reason, then the data yielded will be equally flawed and, thus, invalid. Time on the front-end in deciding what data will be used will save time on the back-end after it is discovered that, perhaps, the data was either flawed or not the right data to use in the first place.
5. Performance Must Be Controllable
The analysis of measurement indicators can drive improved performance but only if performance and changes can be controlled by the person in charge of the particular item being measured. Indicators lose importance if factors are measured in a business but changes within the effected area are never made to improve performance.
Measuring performance that does not align with the strategic goals of a business produces no useful results. For example, pilots do not fly blindly by looking out ahead, they are constantly monitoring all of their indicators (e.g. flight instruments), which allow them to achieve their goal of a safe journey for all passengers. Similarly, a business owner must continuously monitor all of their indicators to ensure their business goals for all employees and customers. Consequently, if time is taken to compute and analyze various indicators, then there should be sufficient consideration to ensure that the measurements used will benefit the business in terms of meeting both short-term and long-term goals.