How can KPIs improve company performance?
Key Point Indicators (KPIs) are different from financial reports. Most business spend a lot of time and money creating and reconciling financial statements. It can often be a long an arduous task. However, it is usually worth the effort as it can help inform the direction of travel, to benchmark against external organisations, and it keeps owners and investors happy (well, informed at least!). However it can be a long process and many businesses prepare financial statements weeks after the financial period. At year-end this could mean being 2-3 months in your next year before you have understood the previous years’ performance.
These types of reports are accurate and extremely informative, however due to preparation timescale they cannot be relied above to understand performance on a day to day basis.
Some companies will complete monthly reporting. Whilst these can be much quicker than quarterly or yearly reports, they are often ready several days or weeks into the following month.
With this in mind, something else is required to monitor daily performance. This is where Key Point Indicators (KPIs) come in.
What are KPIs?
KPIs are measures that a business choose as the most important measure of their performance. As every company is different there is no definitive set of KPIs that businesses should use, but turnover, margins and customer numbers are common.
It is important to note that KPIs are not always financial indicators. A KPI is a method of measuring a particular business process, so it could by website visitors for example, or net promoter scores, or the time it takes to answer calls, and so on.
Often KPIs and the performances can be combined into a balanced scorecard and circulated on a daily basis so that leaders and teams understand how they are performing in real-time.
What’s the difference between KPIs and financial reporting?
KPIs provide detailed metrics for businesses that a financial statements cannot. They can also highlight problems early so that can be rectified before they impact the financial statements.
They are different from financial reports, and it is important to decouple business performance (KPIs) with financial reporting. It is true that the business’s performance will impact the financial statements, but the two do not need to marry up exactly. Businesses often struggle with this concept and there is a focus on making everything match perfectly. However discrepancies are normal. This is all down to cause an affect, a company’s effort does not immediately impact output. Think of it this way:
Effort affects performance reporting (KPI reporting) which affects results (financial reporting).
There is a delay between each of the steps. The size of the delay will depend on how a business operates and it’s proposition. Take for example a pretty common KPI such as new subscriber numbers. The KPIs may report high numbers but the financial reporting does not. This could be because of factors such as: set up times, initial free periods, or payments in arrears.
It’s important to not get caught up with trying to understand the discrepancies and accept KPI and financial reporting are different. However when compared over a long period both sets of reports should show the same trends. If they don’t then there is something wrong with your KPIs, most like they do not match your companies targets.
What are some example KPIs?
The most important things to think about when deciding your what your KPIs should be are:
- Do they tie back to the overall company vision and financial goals?
- Can the be rolled out as objectives?
- Are they measurable?
- Can they be measured quickly on a daily basis?
If the answer is “no” to any of these questions then they are not suitable as KPIs. There are many examples that I can think of, but here are a few to get you thinking:
- Total sales
- Sales per region
- Sales per product
- Number of new customers
- Average spend per customer
- Cost of acquisition
- Net promoter score
- Renewal or retention rates (they are different by the way).
- Customer survey results
- CRM usage
- Site traffic or clicks
Once you have the KPIs you simply need to set up the reporting (preferably in real-time) and away you go.
What do you do with the KPI results?
Once you know what your KPIs are and how well you’re performing against them you can start influence that performance. They will also offer additional benchmarking opportunities that financial reporting alone cannot provide.
The kind of things you can learn from your KPI results are:
- Have the customer deadlines been missed? So you can spot potential customer issues early.
- What product offers are providing the best conversion rate? So you can do more of the stuff that is generating the most business.
- In which department is generating the most complaints? So you can improve that department quickly.
- Who are your best performers? so you can reward and recognises as it happened rather than much later.
- What marketing channels are providing the best leads? so you can focus on this to generate more leads.
Successful businesses use KPIs to drive performance and react quickly. They are able to do more of the things that are going well and improve areas that are doing badly in real time. This provides a balanced proactive approach which is key to helping business succeed.