Manage What You Measure
Take charge of the numbers
What gets measured, gets managed. This phrase was coined by Peter Druker, the ‘father of modern management’, way back in the early 1950s. We still referred to him all these years later.
It becomes challenging to know how our business is doing, our progress to our objectives, what we are doing right unless we are measuring and reporting our progress. These measures are commonly referred to as Key Performance Indicators (KPIs). KPIs can take the form of financial measures, non-financial measures, surveys and observations. A Key Performance Indicator, or KPI, is a measure of how well we are performing. KPIs should be based on what is important to our business, i.e. what are our Critical Success Factors (CSFs), what do we need to do well in order to achieve our business objectives.
By way of analogy take the example of an individual who decides that their aspiration (mission) is to lead a healthier life style; one identified objective is to reduce their blood pressure to a certain level; a CSF is change of diet; a KPI to monitor this is your body weight. If we measure weight loss against a pre-set target then, if that weight loss is not achieved we can have a closer look at what and when we are eating, and then hopefully put this right.
KPIs – Manage What You Measure
KPIs vary widely, depending on the type of business and its goals. The purpose of KPIs is to evaluate an organisations progress toward its long-term goals. KPIs must be measurable so leadership can use KPI factors for assessment.
Remember that KPIs in isolation are pointless and a benchmark/yardstick needs to be set for that KPI, it could be looking to improve what you did last month or last year, that’s a good start point.
CSFs common to all business include profitability, sufficient cash flow, and customer and employee satisfaction. KPIs would include gross margin, customer collection periods, conversions of enquiries to sales, and staff absenteeism.
Care needs to be exercised here, and we need to blend measurement with management of that measure. Measuring and reporting on our gross margins against expectations is a great start, the management process should then delve into the reasons for the variation, and how we can address it.
It’s argued that some things aren’t capable of being measured, for example motivation amongst staff and happy customers. However, though there may not be a single measure for motivation (and to be fair no single KPI tells a complete story), selected measures provide great insight. For example, staff retention, staff absenteeism, referrals by customers can provide that insight.
State an expected outcome. Do this in quantifiable terms. If you are starting on your measurement and management journey then start with a few such as cash flow. Along with, receivables collection, enquiries to sales; a benchmark could be a 5% improvement on what you did last year
Thanks for taking the time to read this. Please Get in touch to see where we can help you with helping you measure and manage your business and accounting numbers.