My boss recently came back from a seminar and was excitedly going on about setting up a KPIs and dashboards. Is this a new flavor of the day or are the KPIs and dashboards valuable tools for running the company? It seems it’s my job to start the process of collecting and presenting the key performance data.
Wanting to Make a Meaningful Contribution in Kansas City
I can relate to the “flavor of the day” business conundrum, but KPIs aren’t one of them. The term KPI (Key Performance Indicator) has been around for quite a while. One article described KPI as a term that “some brainiac coined … to help identify details that matter for businesses.” Details THAT matter vary BY business, of course, but there are commonalities. Often, the financial area is an effective starting point for developing KPIs and tracking them within the KPI dashboard, primarily because the financial systems already have a lot of numbers available and benchmarks to compare them.
In fact, whether or not you actually call them KPIs, the numbers you track every day, month, or year are likely KPIs. For example, comparing today’s sales from your POS (point of sale system) to yesterday’s is a KPI. Analyzing the financial statement margins by region compared to your budget, industry, and prior year are the top level of KPI analysis.
KPI Works from the Bottom Up
Rather than identifying a problem at the top level, design your key performance indicators and KPI dashboards to identify the results and issues from the bottom up. Rather than using sales by product line to identify product mix differences within the region, and then further “drilling down” to look at the performance of individuals, a sales dashboard should identify the individual performance, product mix, or another KPI driving the variance. The department head is then responsible for flagging and explaining variances, as well as addressing the plan to meet benchmarks or goals.
KPIs should drive decisions and lead to action. Obviously, the financial department would have limited reach in the above example situation. Senior management must lead, as well as hold all team members accountable.
Common attributes of a good KPI include:
- Well-defined, measurable information that is readily available or cost-effectively obtained.
- Measuring a factor that has a direct impact on a specific goal or long-term performance.
- Effective communication of the performance standards throughout the company, cascaded to responsible departments.
- Actionable results. You should be able to act on it, holding team members accountable when the indicator digresses from the goal.
Where to Start with Key Performance Indicators
The financial area of your business is often the moderator of the “readily available or cost-effectively obtained” indicator. Frequently, there is so much enthusiasm for the implementation of KPIs that there are too many measures. As a result, it becomes too time-consuming to collect the data and everyone quickly loses interest.
I suggest starting with a few readily available metrics in each department:
- Identify 1-3 key performance indicators meaningful to the performance for each level of the company. Don’t overdo it with the number of indicators you take on at once. For company goals, cascade down; for operating objectives (benchmarks), work from the bottom up. Collections and Accounts Receivable may measure accounts over 90 days against a benchmark (less than 5% of total receivables) or a goal (reducing aging of over 90-day accounts to less than 5% of total receivables – thereby expecting a downward trend). Sales might measure against a goal (5 new customers each month or increasing average ticket to $500 or increase close rate to 50%). Check out this smorgasbord of KPI choices to help you get started – don’t pick too many!
- Determine the best time frame for setting and evaluating goals/benchmarks. Are you seasonal and therefore monthly goals vary significantly? Can you set an annual goal and expect to capture 1/12 of the goal each month? Do you expect it to take 6 months to reduce the 90-day receivables or is the goal to reduce by the end of the year?
- Determine the data elements needed to get the data for your KPI dashboard. For example, does the accounting system age accounts receivable? Is the average dollar value of the ticket available (or the elements needed – the number of tickets and sales dollars)? Is there a sales funnel that measures conversion to sales?
- If the data elements aren’t readily available, identify what needs to happen to get the needed data and whether are you able to capture and use it cost-effectively.
- Review the existing systems within your organization to determine where to potentially capture the data. For example, to measure pipeline, you need to know outstanding quotes. Do you track quotes? If you track quotes, do you “close” them when it becomes evident you aren’t getting the business? Do quotes over x days still belong in the pipeline? Does your system track history to identify how many quotes convert to actual business?
- The key to readily available data is taking full advantage of proper set up of your systems. What are the capabilities of your systems? CRM systems usually measure the sales funnel (calls to quotes to order). Basic accounting systems often have industry specific processing that can collect data (QuickBooks allows for the classification of quotes – won/lost, etc.)
- Beware of GIGO (garbage in/garbage out). With any system, there are ways to scam or carelessly enter data. Optimizing the systems to capture data as it occurs increases the likelihood of complete and accurate data. For example, if all sales calls are required to go through the system, quotes prepared in the system, quotes converted to orders, and orders invoiced, there is little room for finagling. The process itself encourages accuracy.
- Everyone in the company must understand their role in the KPI implementation and why it’s important. Everyone means everyone: CEO, department head, and support personnel. Senior management must lead and enforce accountability as well as monitor response to variances from benchmarks or goals through a well-defined reporting structure.
- Verify the accuracy of the metrics on a periodic basis, as well as the reporting and actions. Incorporate this process into the monthly financial statement close and manager’s meetings at the direction of the CEO.
Establishing a KPI Dashboard to Manage the Information
A KPI dashboard visually represents the performance of KPIs against benchmarks or goals. The most detailed KPI dashboard is at the lowest level of the company and the KPIs and related progress are consolidated as they move higher in the organization.
- Determine the parameters used to judge the performance against a goal. If you are 10% below your goal, should you take corrective action or just investigate? Should your company be 75% of the way to the target on September 30th or is your business seasonal (like retail) and only expected to be at 20% of the goal? The choice of percent vs. dollars isn’t critical to the success of the KPI dashboard, but rather that the KPIs are clear. Each person in the company should have the capacity and resources to reach their benchmarks.
- Determine a visual representation of the KPI at each level of the organization.
- Department level – In the sales department, you may choose racehorses staggered with the “closest to goal” salesperson in the lead (whether the salesperson is closest to achieving the percent of the goal or the actual dollars). The achievement of the accounts receivable aging goal (reduce 90-day accounts to < 5% of total receivables) might show a trend line in green if it’s heading in the right direction or simply highlight the percent in red if going the wrong direction.
- Senior management – The KPI dashboard may only show year-to-date sales with a color (red, yellow/amber, green) to show the progress. This KPI dashboard may not even reflect a report on the accounts receivable unless the A/R was off track or had a significant impact on cash flow. Consolidate data as you move up the hierarchy.
- Some departments in your company may need more fun and competition to motivate them. Others may find success by staying focused on day-to-day performance. Keep the company culture and culture of the individual departments in mind as you plan your KPI dashboards.
Once a year, as part of your planning process, evaluate the efficacy and importance of the KPIs you’ve selected as your measurements. You may find the need to change them, add new indicators, and eliminate those that no longer add value. System improvements for data collection and evaluation can become part of the next year’s KPIs and should be added to your KPI dashboard to give you a constant snapshot of your company.
If the list of potential KPIs or keeping track of the data via a KPI dashboard still seems overwhelming, you’re welcome to contact me for a free 2-hour consultation.
business best practices, business management tips, Dear CFO, performance, quality control