Key Performance Indicators are an important aspect of monitoring your business goals. We’ve previously discussed this in our section on Business Planning.
In simple terms Key Performance Indicators are a small select of measures that you can obtain information on readily to measure how you are tracking towards a goal or how the business is performing.
As it “says on the box” these indicators need to be key towards achieving your goal. There will be many measures available to use, but selecting the right one is vitally important, (and that’s where can be quite handy at working out what’s important for your business). The old saying “of what get’s measured gets done” holds true, selecting the wrong key performance measures can actually influence business behaviour and personal actions that detract you from achieving goals.
Lag versus Leading
Lag and Leading are used to describe whether the indicator reports information on something that has happened “Lag”, whereas a "leading" indicator reports on what is happening. A balance of Lag and Leading indicators is preferable. As a business owner this gives you a focus not only on the road ahead but also the road behind. With this type of information, you are equipped to learn from mistakes and adapt business process towards achieving a better overall outcome.
How do I figure out what Key Performance Indicators are important to my business?
We’ve seen it time and time again where the Key Performance Indicators are skewed towards just purely financial indicators. The problem with this is that financial indicators are lag indicators. As mentioned above, these types of measures tell you about something that has already happened. Whilst you can change behaviours and processes from lag indicators the speed at which a business undertakes change is a lot slower, and to put it bluntly, the slower you are to act the more it is going to cost you in your back pocket. A consequence of not reacting quickly enough.
As we’ve mentioned in our previous post on Business Planning we are proponents of the balanced scorecard approach to establishing business goals. Using the balanced scorecard approach guides us to developing measures/indicators that tell us how those business goals are performing.
To recap on the different areas for establishing business goals, you have:
- Internal Process
- Learning & Growth
Selecting the most important Key Performance Indicators from these areas will assist in developing a suite of Key Performance Indicators that is relevant to your business.
As we mentioned in the previous section, we often see an overuse of financial indicators in the Key Performance Indicator mix. This is because financial information is easy to obtain and measure.
Fortunately today more and more businesses are using not just accounting systems but business management systems specific to the type of business they operate (e.g. job management system, manufacturing systems, construction management systems). This gives easy access to reports that can give us measures on how the business is performing and often more readily than the monthly turnover of financial measures that can be used.
Considering what your business management system can provide, as this may help also frame what key performance indicators you should use in the business.
Unfortunately, there are a number of business indicators that are quite hard to get information on, and they often exist around the customer aspect such as customer satisfaction. If it’s too hard to obtain the information it won’t be measured properly and could ultimately give misleading information.
If you identify a Key Performance Indicator that is difficult to measure consideration needs to be given to how that information could be obtained more easily. An example with customer satisfaction would be requesting a quick customer survey is completed at the end of each job (online preferably so information is easily collated).
What’s some examples of Key Performance Indicators relevant to my industry
It’s ok we won’t leave you out in the lurch here, because we focus on specific industries we have a suite of Key Performance Indicators we know that work well in your type of business. These can be downloaded from the links below.