Key Performance Indicators: How to measure performance in your business
A KPI (Key Performance Indicator) is a metric which an organisation will use to measure whether they are achieving their strategies and objectives.
An organisation will create its overall business strategy and set the objectives it needs to achieve for this strategy to be successful. ‘Critical Success Factors’ (CSFs) are then defined. These are things that, should they occur, will lead to the achievement of the objectives. KPIs are the specific metrics used to measure the achievement of the CSFs. They are very detailed, and usually numerical to enable the business to understand the progress they are making in achieving their objectives.
This sounds like quite a complicated system but it is actually quite straightforward and much easier to understand when placed in the context of a real life scenario.
• Overall strategy = Win the league
• Objective = Win enough games to win the league.
• Critical Success Factor = Score more goals to win games.
• Key Performance Indicators:
1. Number of shots on target in each game. (Or %age of total shots)
2. Chances created per game
By reporting on these KPIs, the football team can clearly see their progress in achieving their CSF of ‘score more goals to win games’. If they achieve this CSF they will achieve their objective of winning games, which in turn will lead to the successful achievement of their overall strategy of wining the league.
Using KPIs in business
A board will have a small set of KPIs that will be high-level and linked to the overarching business strategy. Each department will have their own set of low-level, detailed KPIs to measure their individual performance.
In order to be a KPI (as opposed to a metric), there will need to be some form of a benchmark. This could be a previous year’s performance or (if known) the performance of a competitor.
It is also important to have a mix of financial and non-financial KPIs.
Why are KPIs important?
A good set of KPIs will provide the leadership of the organisation with a view of what is happening within the organisation, and the progress the business is making in achieving its strategy. A drop in a specific KPI will also give the leadership the impetus to investigate, and make necessary changes, if required, to realign with their strategy.
KPIs give teams and individual employees a focal point, helping them understand business priorities so they can focus their efforts on contributing to the success of the business. KPIs are also a way for the leadership team to communicate to individual departments the part they are required to play in achieving the overall business strategy. This enables the entire organisation to understand their role in the wider aims and strategy of the business.
How to ensure KPIs are always useful
There are certain things that need to be done to maintain the relevancy of a KPI so that they are used effectively.
1. Review them regularly, e.g. once a week, in order for them to maintain their effect. Any trends, good or bad, can be spotted and opportunities or threats can be reacted upon.
2. Review at strategic intervals, e.g. once a year, to identify if the KPI is still applicable to the overall business strategy, and ensure they are being used correctly.
3. Make sure they are quick and easy to calculate. KPIs that take a large amount of time to calculate will no longer be relevant by the time they are presented.
4. Use software or technology to ensure accuracy and timeliness. This also brings the added advantage of them being less susceptible to bias.
5. Share the results whether they are good or bad. By communicating to the wider company, everyone involved knows whether more work needs to be done, where they need to focus, or if they are doing a good job.
KPIs in Accounting
All KPIs have an effect upon finance. A strong finance department will be aware of the business strategies, and obviously the KPIs, as these are a crucial measures of business performance.
Accounting departments themselves may also adopt KPIs, depending on the overall strategy of the business. This could range from:
• Processing KPIs: Such as the number of invoices processed & cleared.
• Working Capital KPIs: Receivables Days is how long it takes for customers to pay their debts to the company. Plans may be put in place to drive this downwards and improve cash flow. Equally, Payables Days is the reverse: how long it takes to pay suppliers. This needs to be balanced between holding capital within the business and maintaining supplier relationships.
• Budgets: not specifically a KPI, but performance against budget is important for accounting. This may be more of a CSF than a KPI though, and will therefore produce a set of KPIs in itself.
• Ratios: General accounting ratios, such as gearing (how much debt the company holds), gross margin (sales vs cost of sales), dividend turnover (how many times over the business can pay the dividend) are all important measures in accounting, and are generally used to determine the strength of the accounts.
There are many benefits of setting KPIs within your business.
• Goal Congruence: Everyone will be pulling in the same direction, with the same focus point.
• Strategy Focus: Everyone has one eye on the strategy of the business, and how they can contribute to its success. This means less time is wasted on tasks that don’t improve the KPIs, therefore don’t contribute to the success of the business.
• Decision-Making: provides the leadership with a quick overview of the business. This can help leaders make decisions based on the impact on KPI performance.
• Benchmarks: By using a relevant benchmark, the efforts of the business are focussed on continual improvement. If this is an external source, then the business can concentrate efforts on gaining competitive advantages against the market.
To find out more about KPIs, or if you need help developing your business strategy and objectives, get in touch by calling 020 7317 0040 or emailing us at firstname.lastname@example.org.
*The information provided in this blog post is for guidance only and does not constitute professional advice. Advice should be sought from an appropriate professional, if you are considering implementing KPIs in your business.