“A goal without a plan is just a wish”
- Antoine de Saint-Exupéry
As we begin our journey into 2018, it is time to review our priorities and how we expect our business to grow in the coming year. Key Performance Indicators (KPIs) are a critical tool to ensure we are staying on course.
Every business should have a list of 5 – 7 indicators that they utilize to determine the success of their business and how they are progressing to meet the goals for the year. You can find a never ending list of KPIs on the internet and it’s easy to make the mistake of trying to track every conceivable KPI on a spreadsheet. This broad brush approach makes it too easy to ignore the unfavorable trends and focus on the favorable KPI to confirm how well you are achieving your goals.
The better approach is to choose, at the beginning of the year, those few metrics that match what you are trying to achieve. We all know that we should limit our goals and we should do the same for KPIs.
A good KPI should act as a compass, helping you and your team understand whether you’re taking the right path toward your strategic goals. The trouble is, there are thousands of KPIs to choose from. If you choose the wrong one, then you are measuring something that doesn’t align with your goals. How, then, should you go about selecting the right KPIs for your organization?
Leading vs Lagging Indicators
Some indicators are lagging indicators which show how your business has performed. Financial metrics are classic examples of lagging indicators. They show the results of past programs but don’t necessarily help you predict future performance.
Leading indicators help you see how you are set up for future success. Examples of these are KPIs relating to customer retention and growth. These identify trends in customer satisfaction.
It is important to have the right combination of both types of KPIs.
How Do I Determine Which KPIs To Use?
The right KPIs for you might not be the right KPIs for another organization. Make sure you’ve researched as many key performance indicators as you can to determine which ones are appropriate for your industry. From there, determine which KPIs will help you further understand and meet your goals, and then integrate them throughout your department. KPIs should match your strategy, not just your industry.
Below are some examples of KPIs that I find are useful to middle market businesses:
Return on Capital – Income / Equity
Number of Days Sales Outstanding – Receivables Past Due / Average Daily Sales
Inventory Turnover – Cost of Goods Sold / Average Inventory
Percentage of Customers who increase sales
Percentage of Repeat Customers
Administrative Costs Ratio – Administrative Cost / Total Sales
It’s an Ongoing Process
Like everything in life and in business, managing the KPI’s is a process. The KPI’s the company uses need to be reviewed and evaluated on a regular basis. Some may no longer be as relevant as they once were depending on the results and goals of the business.
- Barry Brick