When building your business, you consider your overall business objectives, as well as your short and long-term financial goals. You then build a strategy to help you achieve these goals and objectives. Your strategy is the map that guides your business and helps answer the big questions. Who will be your target? What are the services you will provide? Where will you focus your business? If you have those answers, you can focus on the tactics to help you build your business, carry out your strategy, and measure your performance.
There are numerous focus areas and degrees to which you can measure the performance of your business. Many business owners do this at a high level or by looking at the bottom line. Although performance measurement is a part of the business lifecycle that is critical to the success of your business, it often does not get the same attention as some other business processes – but it should, because it matters.
The long-term success of your business depends on big-picture thinking, and on grasping Key Performance Indicators (KPIs). A KPI is not simply a performance measurement; it is a direct line of sight to hitting a business objective by measuring the current value or status of a metric, against a given business objective. KPIs help you prioritize your tasks, keep you on track, and let you know whether your efforts are paying off. They help you allocate resources and tell you if you are spending your time and money on the right initiatives. If you are not monitoring KPIs, you are losing out.
Depending on what a business is trying to achieve, there could be just a few, dozens, or hundreds of KPIs to track performance. Deciding which ones to track depends on what is significant to the business, based on its current situation.
Dashboards are used to visually represent KPIs. There are KPIs for specific industries and specific types of business. KPI dashboards can be tied to specific business goals, like “increase profit margins,” or can be designed as role-specific dashboards for CEOs, CFOs, COOs, etc. As there are literally hundreds of KPIs that can be used to track business data, there are numerous ways to build KPIs, both simply and cost-effectively. There are also many providers out there who offer out-of-the-box solutions to help you get started.
Now that you have some idea what KPIs are, you can start thinking about what you are going to do about it. You need to invest the time to analyze your business, and determine the key business areas and components that you need to monitor to stay successful and ahead of the competition. You also need to determine what products and tools, such as AI or computer software, exist that would help you analyze the data and create the reports that you need on a daily, weekly, or monthly basis, to monitor the key areas that are relevant to your business and situation. Many software products on the market are likely to fit your needs. Plus, AI specialists who, using AI technology, could design KPI reports that will save you significant time, while creating efficiencies that lead to increased profits.
Below is an example of a janitorial company, Keep Clean, Inc., that needs to improve the time to address problems with its gross margin. A KPI could be the solution:
One of the most important accounting statistics of a janitorial business is its gross margin: the difference between the revenue generated and the cost to produce that revenue. Keep Clean, Inc.'s, normal gross margin is 18%. The Company's pricing and budgets are based on an 18% margin.
The Company runs their monthly financial statements, which reflect gross margin, the second week of the following month. By then, 4 to 5 weeks of the reporting month have gone by and two weeks of the current month have gone by before they close and report on the prior month. That means it is 6 weeks before ‘historical data’ is available to report that the gross margin has decreased, in this case to 15%. It also means that 6 to 8 weeks go by before the Company’s management begins to determine what went wrong.
If the company is doing $5million dollars a month in revenue, a 3 % decrease in gross margin represents $150,000 of profit that it might have lost for that month alone.
So, in this case, how could a KPI help minimize the time it takes to identify fluctuations in gross margin? The main cost component in Keep Clean, Inc.’s gross margin is labor. Therefore, if there are any significant fluctuations in gross margin, most likely there is something wrong with labor. Labor cost also affects insurance cost, since there is a direct correlation with labor and insurance cost – also a part of gross margin. Management needs to design a KPI that compares the weekly actual labor hours against the budgeted labor hours, by job. Any significant fluctuation would immediately raise a red flag to the operations managers that something is wrong.
Let’s look at this example again, assuming implementation of the KPI. The KPI utilized by the Company compared every job’s budgeted hours against the actual hours, on a weekly basis. Because of a significant variance, job #250 was flagged; actual hours exceeded the budgeted hours by 100 hours. This job was budgeted for 500 hours a week, but the actual payroll hours reported came in at 600 hours during the first week of the month. The KPI report immediately red flagged this job and automatically sent it to the operations manager, who was required to investigate. There could have been a number of reasons for the rise in hours. It could be that: the local supervisor decided to hire his son on the job for extra cash; a fictitious employee was put on the job; or, the customer requested additional work, but a work order was not completed, so the client was not billed for the additional work. Having a weekly KPI monitoring the labor hours will avoid the surprises at the monthly closing, and save the company substantial dollars. This very simple KPI is crucial to controlling cost and maintaining gross margins as targeted.
In this example, the KPI discovers the error during the first week of the month, not 6 to 8 weeks later.
In order for KPIs to be meaningful, they need to be relevant. As your business grows, or changes direction, the type and scope of your critical data also changes. If you are using KPIs, make sure to audit them occasionally, to verify that they are still meeting the needs of your business and its intended objectives. Performance measurement is critical to the success of your business – it matters, so focus on measuring what matters.