For decades companies have used traditional financial statements to help manage and evaluate their performance. The problem with this approach is that financial statements only report on the end results without providing an understanding of the underlying explanations that led to the reported outcome.
Many times when reviewing financial statements with our clients the discussion migrates to operational issues in an effort to help identify and understand the activities that need to be changed in order to improve the results reflected in the financial report. The question is always how to better manage those activities. The answer is that you can only manage what you can measure.
How it works
Identifying Key Performance Indicators (KPI’s) for important business activities and setting up a system to monitor them on a daily basis provides that measurement which then can be managed. The applicable KPI’s are obviously different for each industry. To identify which are most important for your business, consider contacting your industry’s trade group to ask about shared data that can be used in comparing your company’s results to that of competitors.
Let’s assume for example that a small retailer wants to increase sales. Management is concerned that too many shoppers visit the store and then leave without buying anything. The first step would be to quantify the ratio of sales made to total shoppers. To calculate this, the number of sales would come from the point of sale system and the quantity of shoppers would come from an indicator placed at the front door. Management now has identified the KPI and set up a system for daily measurement and progress to goal. They then can manage the KPI by setting a goal for improvement, communicating with store staff the importance of the ratio, providing employee training to improve the KPI, and sharing the results on a daily basis.
Get everyone involved
Having a system in place such as this provides employees with a road map to perform better with a clear understanding of what is being asked of them along with timely feedback as to how they are doing, which is what most employees crave. An incentive compensation plan can easily be created based on a set of KPI’s to motivate the employees even further.
Creating and tracking KPI’s can help businesses of any size and in every industry to reach management’s goals. We can help you both identify the appropriate KPI’s for your business and put systems in place. Call us to begin to make the most of your 2016.