We Manage What We Measure. How to Use KPIs to Drive Profit
I often get asked, “What are KPIs”?
KPI is short for Key Performance Indicator. They show how you are performing compared to your strategic goals and objectives.
If I were to compare KPIs to a road trip, KPIs are like the GPS location data, average speed, fuel levels, weather information, etc. They allow the driver to understand whether they are on track or veering off route. This enables you to make decisions about where to drive next. A GPS will guide you to a destination, and KPIs will guide you to your business destination.
KPIs are the easiest way to track how your business performs.
If your business goal is to make more money, you may track sales growth, operating costs and profit margins.
If you want to attract new customers by creating a great brand, you may measure brand equity and brand awareness.
If you wanted to ensure your employees are engaged, you may measure staff advocacy as a KPI.
And if, like most businesses, all the above matter, then you need a set of KPIs.
The trouble starts when you realise that there are 1000s of KPIs to choose from. Business owners often struggle to select the right ones for their business. KPIs are powerful because ‘you get what you measure’. If you measure and reward the achievement of KPIs that are not in line with your goals, then you are driving in the wrong direction! The wrong KPIs can point people in the wrong direction and even encouraging them to deliver the wrong things.
KPIs give you a target that you can share with your employees so that they can help you to run your business successfully.
So how do you come up with the right KPIs?
The most effective KPIs are those that are closely tied to strategic objectives. When I help business owners select KPIs, we start by developing a performance management framework that conveys the strategic priorities. A single-page diagram of the framework will show how the key objectives support each other to deliver the ultimate goal (e.g. make more profit).
Once the performance framework represents the business objectives, you can develop KPIs. Don’t jump straight to the measures though, as you need to identify the most critical business questions they need to answer.
Take Google, their executive team has identified a set of 35 critical business questions. They now ensure that the KPIs they use are helping them answer their most critical business questions. This way your KPIs are tied to your strategy and you also ensure that they are informative and meaningful, helping you to answer your key business questions.
If you’re new to KPIs, you will be able to find KPIs for your type of business on the ATO website.
The ATO has benchmarks for almost every industry you can think of. But remember they are average benchmarks. You will want to set KPIs that are better than these.
To start your own KPIs, the following can be used:
In percentage format:
- Labour costs as a percentage of sales
- Cost of Goods Sold (COGS) as a percentage of sales
In dollar format:
- Sales per trading hour
- Sales per labour hour
- Average Transaction Value (ATV)
- Average hourly labour rate
To calculate these KPIs, you will need your daily sales report from your Point of Sale (POS) system and your monthly Profit and Loss (P&L) statement.
Print the P&L report with two columns: the first in dollars and the second in percentage of sales. These percentage figures are your actual KPIs.
Good or bad, it doesn’t matter. What’s important is that these are the KPIs you are already achieving. These KPIs can then become the starting point from which to improve your business.
Now that you have KPIs…what’s next?
Now that your first set of KPIs is up and running, you can work on improving them.
Increasing your sales by 1% and decreasing both your COGS KPI and your labour KPI by 1% each, could increase your profit by up to 25%.
Seems like easy work to get an extra 25% profit.
Imagine what could happen if you were able to improve each of these KPIs by 5% or more?
The key to using KPIs to improve your business is to share them as daily or weekly targets.
You can start by setting them on the less challenging side then adjust them up towards the target. This will keep your team challenged.
Be careful not to set a KPI that is a huge challenge, as this can create problems. The aim is to improve your business, not to get your team in a mindset of constant failure, which can happen if they are missing the KPI targets you have set.
Make sure your KPIs are achievable because your team will become excited and engaged as they meet them. With each KPI that you meet, you are achieving your goals and building your profit.
Top 5 Tips to Manage Your Business Finances, Without Going Broke.
Do you want to learn how to read you business numbers and get you “financial” act together? Our Top 5 Tips guide will also show you the 5 essential reports every business owner needs to find the hidden profits in your business.
Amanda Dyason, Founder of ProfitSmarts
We help Australian business owners increase profits, accelerate cash flow and master their financial management. We believe life is too short and precious to be stuck in an under performing business delivering mediocre results.
ProfitSmarts gives you more Profits and consistent Cash flow, putting you back in Control. Because when you get business right, the results are simply amazing.