The Importance of Tracking Key Performance Indicators
There are metrics that a business owner can measure monthly to understand the health of her business and whether it’s on track to fulfill its stated goals. Running a business without the information that the key indicators offer is like driving without rules of the road including speed limit and road signs.
There are a number of types of Key Performance Indicators including Key Strategic Indicators and Key Operating Indicators. There can also be Key Department Indicators and even Key Employee Indicators to name a few. Before you can establish your Key Performance Indicators, you need a sense of the “end game” of your business. The end game can be described in your Business Vision, a document that lays out in detail the inspiration behind your business, who it serves and what you will offer that sets you apart from your competition, your company culture and values, etc. Without it, you don’t have any way to understand where you are headed, whether you are on track or when you have arrived at your ‘destination.’
Where Do You Start?
When you are considering opening a business of any kind, it’s advisable to do what I call a Business Viability Study before going forward. This study identifies the initial investment, (i.e., start-up costs), as well as the operating model that will show you if your proposed venture will be profitable, including what it costs to produce your product or service. It will also tell you how long you estimate it will take to ramp up to your full operating capacity and the number of sales you need to meet your profitability goals.
Every business should have financial statements that track the money that is received, the money that is spent on expenses (both Cost of Sales and fixed expenses) and the resulting bottom line which is the net profit or what is left over after you pay your expenses, including payroll, before taxes and after taxes. These financial statements are essential to understanding the financial health of your business, but don’t go far enough.
Types of Key Indicators
Key Indicators tie the day-to-day operations of a company to the business vision, by measuring your progress in the areas you deem most important to track; things like sales, cost of sales, gross margin and net profit. Companies may also want to track things like number of sales per month, # of sales per salesperson per month, number of leads, number of appointment, fixed costs, etc. Without key indicators, you are most likely working hard but have no way to understand if you are on track to the fulfillment of your business vision.
Key Strategic Indicators are the ones that tell you if you are on track to fulfilling your business vision. Key Operating Indicators tell you about the performance and productivity of your employees as it relates to producing your products and services. Departments can get specific about the key indicators they need to hit to do their part in achieving the company’s goals/vision. Key indicators can even be customized to each employee as part of their ongoing professional development when there is a good management system in place. Identifying your business’s Key Performance Indicators is essential to business success. Without them you are running blind.
If you want help establishing the Key Performance Indicators of your business, call Janice at 707-326-5681.