Edition 14 – Key Performance Indicators

Key Performance Indicators, or KPIs, are the set of numbers you should be looking at in your business — if not daily, then certainly weekly, monthly and quarterly.

They are the numbers that determine what is going on in your business.

Some of them are financial.

Some of them are sales focussed.

Most of them are activity driven.

Many years ago I attended a conference in Coffs Harbour. One of the sessions was about reporting KPIs in business and the example of McDonald’s was quoted. Interestingly, the number that McDonald’s focussed on least was profit.

Their focus was on numbers such as:

  1. Time taken from drive through order to delivery.
  2. Average dollar value of each sale.
  3. Number of customers through the door, hourly.
  4. Amount of complaints about cleanliness.
  5. Waiting time inside the store.

If memory serves me correctly, McDonalds reported 27 numbers across their business. Most of them were activity driven. Very few of them were financially based.

So, what are the KPIs that drive your business?

Profit is the end result, but what is the activity that generates that profit and how are you measuring it?

To help you understand what KPIs you should be monitoring in your Family Business, here’s some examples that apply, depending on the industry you are in:

  1. Number of inbound enquiries.
  2. Rate of conversion from enquiry to sale.
  3. Average dollar value of each sale.
  4. Level of output per hour or per day.
  5. Failure rate for production.
  6. Recall or warranty rate.
  7. Average annual spend per customer.
  8. Number of new listings.
  9. Total sales per salesperson.
  10. Gross profit per line of product.

Each industry has its own specific KPIs. Each family business has its own specific KPIs. So the question is, why is it important to monitor KPIs?

Well, much like Leading Indicators, which we covered in Edition 3 of Growth, KPIs are a window into what is happening inside of a business. If the business is healthy, the KPIs should show that well before the Profit shows in the Financial Statements — or the cash appears in the bank.

When choosing which KPIs should be monitored, remember the following rules:

  1. They should be meaningful — if the number isn’t important, don’t measure it.
  2. They should be easy to measure — spreadsheets, your internal accounting system or even a very rudimentary manual system are all means of measuring KPIs.
  3. Monitoring them should be able to tell a story — you should be able to call up KPIs over a series of weeks and be able to explain what is going on inside your family business.
  4. They should be monitored constantly — don’t do it for a month and then switch off. Make it an everyday part of your business.
  5. Set targets to aim for — realistic and achievable targets will help you monitor “budget vs. actual” in your Family Business, which will help to drive better business performance.

This Week’s Tip

Anywhere between 6 and 12 KPIs will apply in most businesses. The best way to work them out is to stop and reflect on your best and worst quarters in the past 2 years – and ask yourself what activities generated each result.

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