Peter Drucker, one of the most influential commentators on business success, coined the phrase: “What gets measured, gets managed.” Essentially: measure the wrong stuff and you’ll waste time managing the wrong stuff.
Understanding your business and using the data to make effective, strategic decisions is vital to the success of your business.
Setting and managing Key Performance Indicators (KPIs) helps achieve efficiency, growth, optimised financial health and resilience for your business. With the help of your accountant and accounting software, you will be able to identify and measure key areas on a regular basis.
What KPIs should you monitor?
Typically, generic KPIs are universal to most businesses. Remember to be careful when using a word like “generic” and KPI in the same context. We appreciate that each business has a different situation, story, phase, resources, legal obligations and more. Hence, “generic” and “KPI” will change from company to company.
In addition, depending on the type and depth of data collected, the potential of metrics and KPIs will change. In general, however, generic KPIs are not limited by:
- The bottom line for a business. Shows how much profit is left after all expenses have been paid.
Gross profit margin
- Helps determine if the business is pricing its goods and services properly and whether the margin they are making on the products being sold are increasing or decreasing.
Net profit margin
- Shows how effective a business is at generating profit from revenue when all costs are factored in (not just direct costs)
- Gives clues about the rate of growth of an organisation. It’s wise to include factors such as revenue per salesperson and year-over-year comparisons.
Generic KPIs are important to understand and review because they are universal to all businesses. These are basic principles and fundamentals of any business and can uncover A LOT about the overall state of the business.
We’re keen on setting and reviewing specific KPIs for our clients because drilling down into the specific KPIs tell a compelling story. These specific KPIs can provide a range of analytics including:
- Business growth
Specific KPIs monitor “drivers” within a business, however, there are different specific KPIs for every business. For example, if you’re an app developer, looking at particular KPIs such as user growth, subscriptions, the average customer value and website analytics, which are all relevant to your specific business success it is very likely that these KPIs will not be as relevant to a legal firm, who would have their own set of specific KPIs.
The key is to identify specific KPIs, relevant to your individual business and industry.
Identifying Specific KPIs: Key drivers of growth
Identifying KPIs specific to your business means identifying your key drivers of growth vs. revenue. Knowing what is going to drive your growth will allow you to outline a specific set of KPIs related to those drivers.
For example: if you’re a hotel owner a driver of growth may not be simply room bookings. It may, in fact, be event sales, which drives growth in the business. A Specific KPI will then be around a certain number of function or event bookings over room sales.
Key Predictive Indicators – Monitoring your KPIs
To be effective, your KPIs should be:
- The best metrics are those that have the most impact.
- Measure short and long-term KPIs.
- Everyone in the business should know what the KPI means.
- Everyone in the business should know why it’s important.
Reviewing key indicators for your business that assist in predicting future revenues/sales is a powerful resource for planning and strategy.
Consider the monitoring process: how it is done and how often, as well as what the actionable steps are if a KPI is not met and conversely what to do if a KPI is met?
For more information check out: 5 business areas (other than tax) your accountant should work on.
Want to set and manage KPIs for your business?
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