Every good bookkeeper will be proactive in the success of your business. You might be wondering what exactly I mean. Well, one service we at Park City Bookkeepers is providing clients Key Performance Indicator Analysis, or KPI Analysis. KPI’s use various metrics that are industry specific to better understand how successful your business is. Key performance indicators, in practical terms are objectives to be targeted that will add the most value to the business, success is measured in a variety of ways. That’s why it is important to look at a variety of KPI’s. For example, a business that is experiencing huge growth will look different than one that is stable and mature in it’s industry. That being said, all businesses can benefit from KPI Analysis because it will tell a business owner what key metrics they are succeeding at and which need great attention and focus.
Key performance indicators define a set of values against which to measure. These raw sets of values, which are fed to systems in charge of summarizing the information, are called indicators. Indicators identifiable and marked as possible candidates for KPIs can be summarized into the following sub-categories:
- Quantitative indicators that can be presented with a number
- Qualitative indicators that can’t be presented as a number
- Output indicators that reflect the outcome or results of the process activities
- Leading indicators that can predict the outcome of a process
- Lagging indicators that present the success or failure post hoc
- Input indicators that measure the amount of resources consumed during the generation of the outcome
- Process indicators that represent the efficiency or the productivity of the process
- Practical indicators that interface with existing company processes.
- Directional indicators specifying whether or not an organization is getting better.
- Actionable indicators are sufficiently in an organization’s control to effect change.
- Financial indicators used in performance measurement and when looking at an operating index.
Items such as Free Cash Flow, Breakeven margin, EBIT Growth and Net Income Growth should all be important metrics for a business owner to understand and pay attention to. It’s hard growing a business. it’s even harder with inadequate reporting!
KPI Best Practices
Measuring and monitoring business performance is critical, but focusing on the wrong key performance indicators can be detrimental. So can be poorly structured KPIs, or KPIs that are too difficult, costly to obtain, or to monitor on a regular basis.
So what makes business performance indicators “key” and how should a business owner, executive or manager select them? There are six factors that separate effective, value creating KPIs from detrimental, value diminishing KPIs. The right KPIs for your business should follow these KPI best practices:
- Aligned – Make sure the KPIs your are choosing align with the strategic goals and objectives of your organization.
- Attainable – The KPIs you choose to measure should have data that can be easily obtained.
- Acute – KPIs should keep everyone on the same page and moving in the same direction.
- Accurate – The data flowing into the KPI should be reliable and accurate.
- Actionable – Does the KPI give you insight into the business that is actionable?
- Alive – Your business is always growing and changing. Your KPIs should evolve as well.
Here’s a screen short from a sample report we use with our clients. It has grouped KPI’s by importance and clearly illustrates where they are on track and where they are not meeting their goals.
Our Profitability Report demonstrates the company’s breakeven point and margin of safety, both important numbers to understand and pay attention to.
KPI’s aren’t specific to any one industry or type of business. So, as long as you provide a service or sell a product, you should be looking at ways to improve your business. No tools do a better job than that of financial statement and KPI analysis. Call us today to see how to use KPI’s for your business.