How KPIs can help you reach business targets
There is an old saying ‘If you aim at nothing, you will hit the target with amazing accuracy!’
We would all like a ‘silver bullet’ in our business that creates that wonderful profit we seek. The reality is that there isn’t one! There are lots of things that take up the attention of owners/managers in the effort to create a profitable and sustainable business.
There are however some business numbers that can have a big impact on any business’s bottom line.
The drivers to financial performance are ‘Key Performance Indicators’ or ‘KPIs’
Ask yourself – how do you currently track, monitor and drive the financial performance of your business? If you don’t currently use KPIs, you could find a real boost to your profit by focusing on this vital area of business management.
What are some of the ‘Key Drivers’ to financial performance? Here are some examples:
- Sales Company – Volume of Sales, Gross Margin %
- Manufacturing – No of Machine Hours Sold, Labour Sales $/machine hour, material margin%
- Contractors – No of Billable Hours, $ per billable hour, utilization %
Key Drivers vary from industry to industry, but ask yourself this question – “If I was away from my business for a while, what are the five or six things I would want to know about the performance of my business?”
We are not talking about the bottom line results so much … but what impacts the bottom line results ….
To see the value of managing KPIs it is worth calculating how much more profit you could make by improving them. This is called ‘Sensitivity Analysis’.
Here is an example of Sensitivity Analysis based on a manufacturing business with net profit of $80,000
This example illustrates that the most valuable impact is on ‘number of hours sold’, so this is the KPI that should receive maximum attention.
Steps for setting targets for ‘Key Drivers’
- Set company targets for each Key Driver
- Determine profitability from hitting Key Driver Targets
- Are targets realistic?
- Is profitability desired profitability
- Realistic targets that result in a loss may mean your ‘Business Model’ needs to be changed
- Determine actions/plans to achieve the targets and deadline dates
- Set targets for staff who have influence on Key Drivers e.g. sales staff
- Bonus/incentive scheme for achieving targets (careful not to wipe out extra profit)
Monitor Actual v Target
- Monitor Actual v Target by month (or week) for each Key Driver
- Determine $ impact on profitability of variances from target
- For actual < target – what actions can be taken to improve?
- Every business needs to know what are the key things (KPIs) that need to happen to create a profitable level of sales.
- The impact on profit of improving the KPIs needs to be understood and calculated.
- Realistic targets need to be set for the company, divisions and team members who influence them. This helps to get staff ‘buy-in’ and ownership.
- Incentives are a great way to encourage staff to achieve targets.
- Actual versus target needs to be measured regularly to ensure they are met.
- Variances needs to be investigated and below target results acted upon. Above target results need to be also understood and what caused them repeated.