Emma Warren of mentoring, training and business development services provider Portfolio Directors explains how key performance indicators can help small businesses
What are KPIs?
KPIs or Key Performance Indicators are usually the key figures calculated or contained within your financial data. Working with them reveals how well a business is performing. 'Key' means main/important; 'Performance' – how are we doing?; 'Indicators' – as in a warning system. They're very useful.
How can they be used?
To monitor specific performance and measure or compare it, for example, this month's sales against last month, new customers today compared to yesterday or the same day last week. They can also be used to track trends and changes, for example, staff absence rates.
Give me a real world scenario…
If you must find five new £2k customers per month to achieve your sales target and you're only adding one, your KPI can trigger a review to see if your sales function or sales team is underperforming. Alternatively, the market might have changed or simply your budget might be unrealistic. The important thing is your KPIs enable you to find out and take action – before it's too late.
Which KPIs are common?
In addition to the ones I've mentioned? Obviously, sales, gross and net profit, costs, too. These can be daily, weekly, yearly, even hourly for some businesses. To be effective, they must be reported and assessed regularly.
How many KPIs should I select?
Depends on your business, but fewer of the right ones rather than too many. Having the right few helps to keep people focused on key areas. Some KPIs are sector or trade specific. In retail, for example, your KPIs might include sales per employee, sales per square metre of shop floor, customer complaints, etc. There's no point measuring something that won't help you judge your performance. If you stick to the headline numbers, as detailed above, then you won't go far wrong. Don't overcomplicate things.
How can I work with KPIs effectively?
It begins with knowing where you are trying to take the business, then you can set goals or objectives. You now need to work out what you will do to achieve them – that's your strategy. You KPIs should help you to monitor performance/progress as well as the success of your strategy. They also form an early warning sign if things aren't functioning as you need them to.
How often should I review my KPIs?
Depends on what they are and your type of business, but as a general rule, review them at least every month. You also need to keep them in the front of employees' minds so everyone remains focused on key business objectives.
How do I use KPIs with my business plan?
A business plan determines the overall direction of the business and the key steps that need to be taken. Out of this should come an action plan made up of objectives, if the business plan is to be achieved. KPI's can be used as a complementary tool to judge performance, simple as that.
So KPIs are very important then?
They are. They won't solve problems for you, but at least they'll show you where problems exist. If used correctly and set up against the correct indicators, they can be a very useful and immediate way to check progress and highlight problems without having to trawl through reams of data. They also help to keep all team members focused on what is important to the business.
Written with expert input from Emma Warren of Portfolio Directors.