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Measuring Performance; Using Key Performance Indicators to Monitor Improvement - Stanford Management Consulting

Tips and Tools“Julia, you mentioned Key Performance Indicators last time.  Please tell me more about them and how to use these indicators to see an improvement in the overall performance of my company!”

Key Performance Indicators (KPIs) are a type of performance measurement.  They can be used to provide the most significant performance information as to whether the company is on track or not. 

KPI’s represent a set of measures that focus on specific business functions of the company that are most critical for the current and future success of the company.  They are measurements towards the success of reaching your stated goals.  You can’t manage what you can’t measure! KPI’s are also known as performance metrics, business indicators, and performance ratios. 

So, why are KPI’s important to me as a small business owner? 

VISION (focus on the future)

OBJECTIVES (convert the vision into something you can measure)

GOALS (defines what needs to happen to achieve your objectives)

Remember your vision, the dream, the reason you started your business? Is your vision clear?  Have you developed objectives for the company that support your vision? Are your goals relevant to meeting the objectives?  These questions are important no matter what the size of the business.  To meet the objectives of the business, we need to set goals that help us achieve those objectives, plain and simple. Without goals that support your objectives, you have no direction.  

Developing Key Performance Indicators

  1. Identify the results you expect. In order to measure your performance with key performance indicators, first you need to know what the goals actually are. Establish clear goals that map to areas of the company: revenue, profit, expenses and so forth. Key performance indicators are not limited to income. Review business goals, and apply these to the desired results.
  2. Establish the numbers needed to reach goals. Go beyond just identifying the desired results. Identify actual numbers that represent company objectives. Ask yourself how much profit the company needs to make, how many new customers it needs to add, how much money it needs to save. A company that makes $1 million a year might have a goal of making $1.5 million a year. That $1.5 million is a specific, clear goal–more than just a goal of increasing company profits.
  3. Identify the progress that has occurred so far. Key performance indicators work alongside specific company activities, and developing indicators for future activities requires an understanding of what has already occurred or is in the process of occurring. If the company has a goal of making $1.5 million a year and is currently making $1 million a year, the company is approximately 67 percent of the way toward its goal.
  4. Determine the percentage of change that has occurred within each area of review. In other words, take a closer look at the current numbers–not focusing right now on the future numbers–and consider what has happened in the past. Doing so will enable you to create more effective goals for the future. Look at the percentage of change on different scales: the change in profits from one July to the next, or the number of clients between one month and the next.
  5. Establish the frequency of reviewing these indicators. Looking at key performance indicators should not occur just once but should be a process that occurs at stated intervals over time. Each area of a company studied will require a different frequency. Company profits might need to be reviewed only monthly, whereas satisfaction issues should be reviewed quarterly. Determine the frequency based on the nature of the company and industry.

Many small business owners think that KPI’s are something that only large businesses would be concerned with. However, identifying key areas in your business, no matter what size, allows the owner to quickly monitor the current health and direction of the business. 

What do your KPI’s say about your business? 

To really understand your business you have to collect data about your business and then turn this data into meaningful information.  Data itself is not information.  You evaluate the data to identify trends or inefficiencies in your business that are creating profit leaks in the form of lost revenue, out of control expenses, poor process management.  All of which are important to all businesses. 

Key Performance Indicators help a company define and measure progress toward a stated company goal. Many things are measurable. That does not make them key to the company’s success. In selecting Key Performance Indicators, it is critical to limit them to those factors that are essential for the company to reach its goals. It is also important to keep the number of Key Performance Indicators small, to keep it from being overwhelming and discouraging.   Everyone’s attention should be focused on achieving the same KPIs. 

Key Performance Indicators are a perfect management tool to use for monitoring improvement to the overall performance of the company. 

You Can’t Manage What You Can’t Measure!