Key Performance Indicators and why they’re good for any business.
In our last blog we chatted about what a Chartered Management Accountant is and how they can help you in your business. In this blog we would like to share with you some tools that Management Accountants use that will help you analyse your own business success and give you information that you can use to plan for growth or just monitor your performance.
Too many businesses bumble along on a day-to-day basis without really knowing where they are going, how they are going to get there or even if they are anywhere near the “there” at all. Hopefully after reading this blog, you’ll have something you can use so you don’t fall into this as well.
To make your business even more successful have you thought about using Key Performance Indicators or KPIs? A KPI is basically a measure of business success; however for a KPI to be a good one it should have various qualities.
A way to remember these is by the mnemonic TRAC VW
So, a KPI must be:
- TIMELY – it must be provided in good time so that a business can take any remedial action to get back on course, weekly, monthly etc.
- RELEVANT & RELIABLE – you must be able to rely on the information and it needs to be relevant to the business success and goals.
- ATTRIBUTABLE – it must be produced as a direct result of what the business is doing and not measured against something which is out of the business’ control. For example, a garden centre may think that monitoring the weather against the volume of sales is a good measure, but they can’t control the weather, so a better measure would be the value of sales per square foot/metre of retail space.
- COMPARABLE – there needs to be consistency in what you’re measuring otherwise it’s difficult to know whether you have actually improved.
- VERIFIABLE – the information needs be easily seen, where it came from and not argued against.
- WELL-DEFINED – so anyone in the business can understand what it is measuring. There should be no doubt about what it is measuring or what goes into the figures being produced.
Let’s have a look at some good examples of KPIs
Most people would think that KPIs are financial, most common being Net Profit and profit margins, however I would encourage you when thinking about KPIs, to address all areas of the business to give a rounded view as finance is just one part of a business’ operation.
A very well-known management accounting tool which does this is called the Balanced Scorecard which divides a business into 4 perspectives and encourages KPIs to be introduced in each one in order to keep an eye on the whole business performance.
These perspectives are:
FINANCIAL – obviously every business wants to make money
CUSTOMER – you can’t afford to take your eye off the customer or the customer will go elsewhere
STAFF/LEARNING – invest in the right people, develop the right skills to be the best at what you do
PROCESSES – understanding what your internal processes are and make them as efficient and effective as possible.
And examples KPIs relating to these are:
FINANCIAL – Turnover, net profit, expenses as a percentage of sales
CUSTOMER – number of new customers per week/month (if measurable), retention rates, satisfaction
STAFF/LEARNING – revenue per employee, salary costs as percentage of sales, absenteeism rates, CPD courses
PROCESSES – employee productivity, quality of products/services, leads generated & lead conversion rate
It has been said that if you fail to monitor the business in all of these areas, it is like sitting on a 4 legged stool which has a leg missing and is wobbly and so you are likely to fall off.
Hopefully you can see the benefit of monitoring your business in all of these areas.
So if you would like help developing your balanced scorecard then get in touch with me on 01207 509871 or drop me a line on firstname.lastname@example.org. I can sit down with you and help you work yours out too.
It’s not like this at Westwood Accountancy!