An ‘Early Warning’ System For Your Business
Business isn’t the only place for clear objectives and goals. Ask any ‘Life Coach’ and they will likely tell you, life can be greatly enhanced by having clear goals and plans to achieve them.
In business they are generally referred to as ‘Key Performance Indicators’ (KPIs).
There are two types of KPIs – ‘Leading KPIs’ and ‘Lagging KPIs’. Leading KPIs are those that drive activity and results and ‘Lagging KPIs are those that measure the results.
An easy way to explain the difference is to liken it to a personal life goal of losing weight. If you set yourself a target of losing an amount of weight the question is how are you going to get there? The simple answer is to monitor and manage your energy intake and output i.e. food and exercise.
Your leading KPIs for intake and output is the number of calories required for your age, weight and gender to either maintain current weight or to lose a specified amount. Your lagging KPI is the amount of weight you lose over a period. Weight Watchers and others have spent years refining this process.
In business it’s very similar. If your goal is to improve profit and cash flow and ability to grow your business, you need to work out what are the key drivers impacting results. Let’s discuss both types of KPIs.
Product/Service Development: If you want to maintain an edge over your competitors, you need to have a plan to constantly develop your products and services. KPIs to ensure improvement here might be
- Number of new products/services launched
- Number of R&D projects undertaken
Marketing: If you want to keep pace with the market you need to keep letting them know who you are and that you are ready and willing to help. KPIs here could be
- Number of visitors to your website or premises
- Number of enquiries received from a particular marketing source
- Another useful KPI to ensure a good return on investment of your marketing dollars could be cost per enquiry. This helps you to gauge the value of all marketing dollars spent
- Number of contacts on database or Customer Relationship Management system (CRM)
Sales: Once you’ve got interest from the market you need to convert that interest into sales and ultimately dollars onto your bottom line. KPIs here could be
- Number of quotes provided
- Number of quotes won
- Number of quotes lost
- Sales conversion rate i.e. number of sales calls made compared to those converted
- Upselling rate i.e. how many add on products/services were sold to customers
Operations: When you have made a sale and it’s time to deliver to your customer. To ensure a consistently high level of service, it’s vital to measure your operational performance. KPIs here could be
- Personnel productivity i.e. how many hours have been sold compared to those paid to service staff
- Work in Progress days i.e. how many days are jobs in progress prior to finishing
- Rework hours – to fix mistakes on jobs
- Stock turnover rate
- Level of backorders
- Number of days for customers to receive orders
- Product returns/complaints/defects
- Hours downtime of staff/equipment
- Overtime hours
Customer Service: Once you have a customer, it’s much easier to retain them than it is to get new ones. KPIs here could be
- Customer retention rate
- Number of new customers acquired
- Number of major client visits attended
- Customer complaints received
- Testimonials acquired
- Referrals received
Finance: Happy customers have no reason not to pay on time, so if everything else is in order, some KPIs here could be
- Accounts Receivable Days i.e. how many days are customers taking to pay, on average
- Profit by
- Customer or type of customer
- Product/Service or type of product/service
- Accounts Payable Days i.e. how many days are you taking to pay your suppliers
- Number of price increases or discounts given
Human Resources: Happy staff provide great service to happy customers who are happy to pay, so how happy are they?
- WHS incidents/hazards
- Staff turnover
- Staff satisfaction
- Ideas for improvement submitted/suggested
- Staff training hours/events attended
- Incentive payments made
- Staff sick leave days
These are mainly results oriented indicators measured both monthly and year to date such as:
- Sales versus budget and last year
- Gross Profit percentage versus budget and last year
- Overheads versus budget and last year
- Overheads as a percentage of sales versus budget and last year
- Net profit percentage versus budget and last year
- Current Ratio
- Net equity
- Sales growth percentage
- Inventory Days
- Work in Progress Days
Notice how the list of ‘Leading KPIs’ is much larger than the ‘Lagging KPIs’? That’s because it takes a lot to achieve a result in most businesses.
Some business people tend to focus on the ‘Lagging KPIs’ and fail to measure the ‘Leading KPIs’!