By C Norman Beckert
A recent SCORE client indicated that a friend had suggested he establish several key performance indicators (IPIs). The client was unfamiliar with the term and asked me to explain the concept and to recommend several KPIs he could consider in the management of his business.
We have all heard the adage that "you can't change what you don't measure." My client was typical with many SCORE clients in that KPIs are not routinely determined and consequently very few measures are considered.
Simply stated, KPIs are measures that enable a business owner to determine the status of the business. For example: sales minus expense equals profit or loss. Here we have three significant indicators of a business' operation and condition, namely, sales revenue, expense and either profit or loss. Tracking monthly sales, expenses and profits over time provide an overview of the business and will help the business owner determine where his efforts sould be directed to improve or perhaps "save" the business.
My recommendations to my client included the following key measures;
Accounts Receivable Days Outstanding
Are you following up on past due receivables? If your terms are net 30 days, do you have a system in place whereby you follow-up starting immediately on day 31? If you are not being paid on time, you can quickly get in the hole. Track the average for all accounts but focus on those past due.
Do you know the sales trend for each of your major customers? If business is falling off do you know why? It might be appropriate to call those customers and find out why. This also applies if your business is a mix of direct sales versus web-based sales. Measure the ratio of web-based versus direct sales.
Impact of Advertising
Are you asking your customers if they have seen your ads be they yellow pages, print media, TV or radio? Keep the responses so you know where to place your marketing dollars.
Are you measuring website hits? Perhaps your site does not have enough of the key words (SEO) to attract interest in yur products or services. If hits are falling off it may be time to refresh your website and get some professional help.
Sales Revenue, Gross Profit & Net Income
I suggest you should be plotting all three every month and comparing this month to last year and the previous year. If you were purchasing your business, these would be part of your due diligence in valuing the business.
Operating expenses can creep upward and unless recorded and plotted monthly the business owner may not be aware of escalating costs that should be controlled.
Return on Assets, Return on Equity
Owning a business means you have made an investment. You really should know the returns you are achieving.
Most business owners selling retail or wholesale have inventory. Measure your turnover. The simplest ratio is Annual Sales divided by current Inventory Value. Retailers such as office supplies, hardware stores, plumbing supply outlets all shoot for no less than 12 turns or 1 month on hand. As part of the inventory analysis identify the 10% of the items tha account for 80+% of the inventory value on-hand. Address those first.
Manufacturing & Construction
- Employee Safety: If your business is manufacturing or construction keep a log of safety incidents.
- Manpower Utilization: Measure output per man hour
- Waste: Measure rework and measure the waste stream
- Quality: Is your process stable and capable? Total quality measures are equally applicable to services businesses.
Customer satisfaction may be difficult to measure. Think about an annual survey of your customers. Within the past week I was asked to respond to surveys from an auto dealership, a pharmacy, a restaurant and from a card shop. They are serious about customer satisfaction.
By establishing a set of Key Performance Indicators the business owner will be better prepared to identify potential issues and to take corrective action.