Using KPIs to Move the Needleby Michelle Bomberger | September 3, 2019
A number of years ago, I asked my husband, a finance guy, to review the company’s budget for the coming year. He looked at our projected top line revenue (which was projected to be a significant increase over the prior year) and asked, “Where’s the additional revenue coming from?” My response was that I took our performance from the prior year and added a “reasonable” percentage increase. He raised his eyebrows and asked deeper questions – which I couldn’t answer. At that time, we tracked a lot of information about where our new business came from but not a whole lot else. There was no objective basis for my “reasonable” percentage increase.
So what about your business metrics? We’re almost three quarters of the way through 2019. How is your business doing against your plan? Have you been surprised by your business results? Do you know how the rest of the year will play out?
It’s common for business owners to just keep doing what they’re doing without formally incorporating data or predictive tools for the business. The mindset is: What’s worked in the past will work for the future; and if I keep working hard, the business will keep coming. We know, deep down, this is folly but we don’t have the time to focus on planning. The result is that we continue to run on the hamster wheel in the business and see less than stellar results.
What needs to change?
First, uncover what factors drive the business’ success. A first step is to consider what defines “success” in your business. Most businesses are focused on the financial figures of revenue and profitability. If that’s the case, then you want to know the factors that influence revenue and profitability in your business. Note that these factors might differ from other businesses – even from other businesses in your industry. Your business may be connected directly to one key customer or referral partner, so you must consider what actions on their part impact your business positively or negatively. In retail or restaurants, consumer confidence data or actions by competitors might affect your business more heavily than in a commercial manufacturing context. Similarly, businesses that rely on commodities as inputs such as oil will monitor cost of goods sold and understand the impacts of price changes on their bottom line. In recent years, employee engagement has become a critical factor to monitor because the costs of hiring are so high. Take this information and determine what measurements give you insight into your business’ performance. Pick the top 3-5 and use these as your Key Performance Indicators or “KPIs”. Your KPIs should be more focused on leading indicators that give you insight as to what will occur next but lagging indicators are important as well.
Second, find a method to track these factors. The KPIs do little for your business if you don’t track them religiously, analyzing them for trends. If the underlying data shifts or you change the way you track or calculate, then the data is meaningless for purposes of comparing one period to another. Pick a method and stick to it long enough to see the trends. Most software provides reporting tools or the ability to export data to a spreadsheet. Depending on what tools you have in place, find a way to capture and track the KPI information and translate it into a “dashboard” that is quickly and easily digestible for you and your team.
Third, understand the meaning of the data and take action. Tracking the data alone is not going to help your business. Once you have data over a few months, evaluate the data against the business results. Are the chosen KPIs actually aligned with your business results? Just because you think these factors are relevant to your business success does not necessarily mean they are in fact the drivers you thought they were. Analysis of the data trends will help you understand how the factors interplay to move your business. From there, you can use it not only to predict results but also to proactively make business decisions about where to exert your efforts.
You’ll notice pretty quickly that a focus on KPIs will move the needle in your business. It gives you and your team an objective way to look at and influence the key success drivers.