Identify And Leverage Your Key Performance Indicators

by James Phillipson

Key Performance Indicators (KPI) are quantifiable measurements that reflect the critical success factors of an organization. They will differ depending on the nature of the business and its priorities.

Some KPIs should focus on short-term priorities and others on long-term strategic issues. So a typical business would have both sales for the current month and for the year-to-date period in its KPIs.

The Key Performance Indicators selected must

1. reflect the organization's goals
2. be key to its success
3. be measurable

The definitions of what they are and how they are measured do not change often.

Start With Financial Indicators

If a Key Performance Indicator is going to be of any value, there must be a way to accurately define and measure it. As a result, many businesses start with financial indicators that are based on the accounting records. Financial KPIs can include metrics based on both balance sheet accounts and earnings accounts. For example, a bank balance or days sales outstanding are very common indicators based on balance sheet accounts. On the other hand, where statistical data is maintained they are appropriate to be a KPI (e.g. volume of product manufactured, number of orders received, headcount, etc).

Update the KPIs regularly and incorporate them into the ongoing reporting and management of the business. Include them in the budgeting process and report the KPI compared to budget and compared to prior periods.

Ensure that you investigate and take action on any KPI that changes from expectation. Challenge your management to improve on selected KPIs each month. For example, next month challenge them to improve days sales outstanding by 10% (and then illustrate the success by showing the affect on cash flow).

Develop A Dashboard

In addition to monthly tracking, many businesses, develop a “dashboard” or weekly snapshot to monitor the status of the identified KPIs for the business. There are software tools that facilitate this. For most businesses this is a standard way for all those with access to the dashboard to see the status of the KPIs (Confidentiality usually limits the staff with access to some or all the indicators). Where the accounting system is an ERP system that is maintained in “real time”, it may be reasonable to maintain instant measures of the critical metrics that drive your business.

If you do not yet have a defined and agreed set of KPIs in your business, this is an area that your Controller (whatever their title) should be able to develop with input from management. It is not necessary to invest a significant amount in the reporting. If your ERP (Enterprise Resource Planning) system does not have a dashboard module, Excel be used and often is. If you have a weekly snapshot, this is a form of reporting of the critical data for the business and an alternative to the reporting of KPIs.

Links

• Image courtesy of Joy Fera

James Phillipson is a Chartered Accountant and a Principal of Mastermind Solutions Inc. with over twenty years experience in large and small businesses. He has provided financial counseling to his clients since 1996, often in the role of a Controller or Chief Financial Officer, for both public and private corporate clients. James has experience in financial roles in a wide variety of businesses and industries. This includes several large corporations and many medium-sized public and private companies. James can be contacted at james@mastermindsolutions.ca or 905-731-8255. You’ll find more details on the Experion website and LinkedIn.