Using KPI’s To Improve Business Performance

Measuring your business performance involves more than just tracking the dollars, you can use KPI tracking to improve your products, your overall productivity and efficiency, as well as growth and net profit.

Business performance KPI’s can also be used to help you uncover trouble spots with departmental specific processes, products and productivity being tracked against targets or past performance benchmarks.

The Financial KPI’s Your Business Should Be Using

It’s important to understand that Financial KPI’s are lagging indicators of business health. So if your profits are down, relying solely on the financial KPIs to tell you that, means that you’re reacting to bad news well after the problem started. However, that doesn’t mean they shouldn’t feature strongly in your KPIs list.

Traditional KPI favourites include:

• Gross Profit
• Gross Profit Margin
• Operating Cash Flow
• Days Sales outstanding

Gross Profit

This KPI is clearly the leading KPI for business owners and accountants, however as a lagging indicator, relying solely on your Gross Profit to tell you what’s going on in your business means you’re only going to be able to react to the cause after you’ve seen it impact your bottom line.

Gross Profit Margin

Clearly the bigger the margin you achieve over the cost of goods sold the better, but are you tracking your profit margin over time? Gross profit margin may change as your business grows, as the number of competitors increase or as your bring on more staff. The other big consideration for this KPI is how you stack up against your industry peers – if your industry’s standard is 30%, but your GPM is somewhere around 7% then its time to take a hard look at your operations.

Operating Cash Flow

On the surface this looks like a KPI that tells you how much cash you have on hand, however it is a useful indicator of how long its taking your customers to pay their invoices.

Days Sales Outstanding

As with Operating Cash Flow, this business KPI contains the specific information about how long it is taking for you to get paid. Clearly the longer it takes for you to get paid the greater your risk of cash flow problems.

Leading Indicator KPI’s Your Business Should Be Using

Leading indicator KPI’s provide early intervention opportunities into your operations, before business issues become revenue issues (which you only get to see after they’ve happened).

Some of the leading indicators you should be measuring are:

• Sales Pipeline Activity
• New Customer Acquisition Rate
• Employee Engagement Scores
• Customer Satisfaction Scores
• Inventory Turnover

These, and other leading indicators, such as time to market or average order fulfillment times can give you an idea of what’s to come. Clearly if your order fulfillment times are increasing then you customer satisfaction is going to drop, which will lead to reduced return customer orders.

On the employee side, if you’re failing in the employee engagement area then your cost of new employee acquisition and ramp time or training is going to blow out soon – while conversely it is likely that low employee job satisfaction is going to impact customer orders in some way as employees will feel less inclined to do their jobs well.