I am often asked by entrepreneurs what I think could help their business. Of course, we always talk about their product or service and how they market it to the right customers. Then we talk about employees and the challenges of meeting customer demands. As those discussions go on, I like to recommend that they develop and use a few simple metrics to monitor their operations. Unfortunately, many entrepreneurs haven’t seen the value of this kind of information.
Often this is because they simply see information as a compliance requirement. For others, they may have tracked very complex information that requires a lot of effort while returning little value. In some cases, businesses have tracked the wrong information, so it does not help the organization. For all these reasons businesses have not found value in information.
As a CFO, I find there is real value in tracking the right information, particularly performance metrics. Metrics called Key Performance Indicators (“KPIs”) provide objective measures for a business to monitor itself. These metrics are a critical addition to any organization that wants to improve.
An effective KPI management process should adopt a few (perhaps ten) ways to monitor an operation. These metrics should be objectively based, readily obtainable, and tracked consistently. If properly selected, these metrics will become a focus for the organization to help guide and gauge an organization's success.
Performance metrics should clearly align with the organization’s goals and expectations. That way the whole organization will understand what is important. Managers and employees alike will constantly be reminded of the organization’s goals when the KPIs are discussed. KPIs is often built into employee incentive plans to ensure ongoing team focus.
With that as background, what really are Performance Metrics or KPIs? KPIs are measurements taken at points in time and then consistently tracked. The numbers can be either operational or financial.
Operational KPIs monitor how the business activities are performing on the production floor, by the service team, or in the warehouse. Some examples include response time, production hours, rework figures, and the number of customer complaints. These metrics should measure key areas of focus for the operation. Financial metrics monitor the organization’s ability to convert operational performance into profits. These metrics include sales growth, profitability ratios, and liquidity ratios.
The Company CFO should be an integral part of identifying KPIs, designing the system to capture, calculate and report KPIs frequently, determine acceptably and targeted KPI performance, and assist executives in interpreting trends and taking appropriate actions based on these conclusions. If you need help with this process, please call the Florida CFO Group.
This is Part 1 of a 2-part blog. Read Part 2 HERE.