Tyre Distributor
Tyre Merchants
June 29, 2018
Why your business needs Policies
September 4, 2018
Show all

KPIS & Budgets

Why they need to be both carefully designed and carefully implemented

Most business owners are aware of the value Key Performance Indicators can play in monitoring and driving desirable activity. If not, I strongly suggest you become familiar with the concept of KPIs.

Now I don’t mean you have to go into overdrive and have hundreds of them measuring everything you do.

Start by picking a maximum of five of the more commonly used KPIs as listed in the attached table. Once you are familiar with them you can start considering getting in to more and more detail – remember the ultimate aim is for you to have the critical information you need to make better decisions.

Well-constructed KPIs provide business owners and managers a lot more detail than just a simple reconciled Profit & ossL or Balance Sheet, which is often the extent of their information system.

I recently came across a quote from the great thinker Anonymous – “the odds of hitting your target go up dramatically when you aim at it”. This nicely ties together the concepts of KPIs and budgets.

KPIs will always be even more powerful when used in conjunction with a budget. Rather than just having a KPI that records performance in isolation or compares current performance to what happened this time last year my strong recommendation is to prepare a budget and set a target for the KPI. That way you are monitoring how you are performing against how you expected to be performing.

It is also critical to ensure your budgets and KPIs are about more than the straight financial aspects of your business – must be both quantitative and qualitative measures.

An easy example of that is in relation to monitoring your debt collection system. If you only measure how quickly you get paid you might have a great looking debtor list. However, if the people enforcing the collection policy, and being rewarded for the lack of any slow debtors, are like the proverbial dog with a bone you might find your customers are turned off and will go to your competitors.

Sometimes the long-term relationship means there has to be a bit of give and take. So, by all means measure your collection performance but also measure the overall customer satisfaction levels and rate of return buying.

So, my challenge to you is to work up front to develop the relevant KPIs through a whole of business budget process, and definitely do not wait to use a KPI or your P&L to tell you where you’ve been.

TABLE 1. COMMONLY USED KEY PERFORMANCE INDICATORS

BUSINESS AREA CRITICAL SUCCESS FACTOR KPI
Employee productivity Output per employee (#, $)
PRODUCTS AND SERVICES Inventory control Inventory turnover ratio (%)
Production efficiency Manufacturing lead time (time)
Wastage Units/value/$
Service quality management 1. Cost for administrative error / management revenues ($)
2. On time delivery (%)
MARKETING AND SALES Customer activity Number of customers (#)
Customer satisfaction Satisfied customer index (#)
Customer service Time spent on customer relations (time)
Market penetration Market share (%)
Sales operations 1. Direct contact with customers per period (#, time)
2. Sales closed / sales contracts (%)
Sales volume Annual sales per customer ($)
PEOPLE Employee satisfaction 1. Absentee rate (time)
2. Leadership index (#)
3. Satisfied employee index (#)
4. Turnover of full time employees (#)
Training and development 1. Training time per employee (time)
2. Training investment per annum (total $)
3. Training investment per customer ($)
Information technology Investment in IT ($)
SYSTEMS AND PROCESSES Occupational health and safety Days lost to injury (time)
Sales and credit system Average collection function expense per customer ($)
Administrative services costs Administrative costs ($)
FINANCE Cash management Cash flow (acid test %) ( closing bank account).
Income 1. Gross margin ($)
2. Profits per employee (%)
3. Profits to total assets (%)
Revenue 1. Revenues per employee ($)
2. Revenues to total assets (%)
3. Revenues resulting from new business operations
Yields Return on investment ($)
By Peter Coughlan
Jason Manning
Jason Manning
Jason Manning is a cutting-edge Change Facilitator, Business Analyst, Leadership Coach and Business Growth Specialist. Jason is driven by the desire to see business owners earn what they want to earn, experience freedom in their business and create a lifestyle they have always wanted. The skills and knowledge he possesses allow Jason to provide business owners with the tools and the mindset they need to succeed. This is his legacy, what he contributes to the world. Individuals living to their true potential, integrated at all levels.

Leave a Reply

Your email address will not be published. Required fields are marked *