An appreciation of KPIs and why every business should have some

I’ve always been a modest runner over the years – not huge distances, intermittent. Recently I’ve used Strava for the first time. The result? Five runs in each of the first two weeks I used it, culminating in my furthest distance for some years. (No distances included to spare the author’s shame).

It reminded me of the impact of setting KPIs (Key Performance Indicators).

Knowing how far and how quickly (or slowly) I’m running, has both motivated me to get out and run and pushed me a little further each time.

At TAB we are strong advocates of setting KPIs for your business. They are your ‘vital signs’ – important measures related to performance. Why are we advocates? There are some good reasons below.

Why set KPIs?

There are a number of benefits. KPIs can:

• Enable informed, objective decisions (you have evidence, KPIs reduce guesswork)
• Focus time and energy on what matters – the old adage ‘what gets measured gets done’
• Identify when and where to take action (if you are not on track with a lead measure, see below)
• Specify expectation of job performance for your team – and allow you to monitor progress
• Create healthy competition amongst teams
• Allow you to benchmark your business performance against others (if you have access to industry data or average performance for companies of your size)
• Improve communication

Ultimately, of course, carefully chosen and monitored KPIs – and the action taken to drive them – should feed through to the bottom line (and/or other critical parts of your vision for your business).

Taking action is key

KPIs are a tool, to be used to help achieve goals and vision. Armed with the tool, skill and judgment still needs to be exercised in determining what action should be taken.

What types of KPI are there?

In broad terms, KPIs fall in to one of two categories: lag and lead indicators.

Lag indicators are data that record what has already happened. A set of accounts is an excellent example. Lead indicators are targets that are set for the future. Revenue targets are a good example. Whilst both have their uses, lead indicators are particularly helpful, as they enable a business to respond and take action if an indicator is off target.

How many should I set?

There are all sorts of measures that can be KPIs, after all there are many things that can be measured. However, an important part of the name is the word key.

The KPIs you select should be important - vital – indicators of the business’ success. If you perform well at your KPIs then the business will perform well.

Ideally at a company level you should have no more than 3 to 5 indicators. That way, you are getting a view of the company’s performance at several critical factors, but it is not overwhelming to follow (or to set up and track).

Some businesses also set KPIs within ‘departments,’ for instance, in sales or in production. So, there may be a good number of KPIs set and monitored within the whole company, but only 3 to 5 are followed at a company level. It can also be highly effective to set 2 or 3 KPIs for individual employees.

If you are currently running a business that doesn’t use KPIs (other than, say, accounts) – or your business is relatively small - then identifying 2 or 3 for the business often makes sense.

Which areas of my business would benefit from KPIs?

Potentially, quite a few.

Having financial KPIs should be a given for any business. Nearly all businesses will have a set of annual accounts. Others also have forecast or revenue targets. There are a number of other financial KPIs that can be used (see table below). A key one that is sometimes overlooked – and is particularly critical for many businesses at the moment – is cashflow.

There will be other areas of the business that are critical to its performance – they will vary in priority and importance by business – and measures from one or two of these areas would also be sensible to monitor at a company (senior management) level. For instance, sales, marketing, customer performance, delivery, operations, suppliers, HR.

What measures might I set in my business?

There are some excellent sources with large lists of potential KPIs to use (two good examples are Key Performance Indicators: the 75 Measures Every Manager Needs to Know by David Mann and Key Performance Indicators: Developing, Implementing, and Using Winning KPIs by David Parmentor.

A rather more concise summary of some key measures includes the following:

What else?

Some other important points:

• With lead indicators it can be useful to set RAG indicators (red, amber, green): levels at which to take or prepare to take action (red being the level at which intervention is needed)
• Balance is an important watch word – having targets that complement each other is useful. For instance, simply setting revenue as a KPI (especially if it is incentivised), without measuring profitability or margin, could lead to a good turnover but limited profit or even going bankrupt
• Choose KPIs that you can measure accurately – and then make sure you do! This is key for reliability and credibility.
• Review frequently but always exercise careful judgement in changing KPI targets – you don’t want an impossible target to be demoralising but equally it is usually better to identify the action needed to improve a missed target rather than reduce the target
• Share KPIs with your team and consider having their input to setting them – both should lead to greater buy in and better performance in meeting them

So, in summary, carefully chosen and monitored KPIs can improve performance.

Even my running.