If you were embarking on a long journey it would make you pretty nervous if the fuel gauge was out of action or the warning lights didn’t work. This is the equivalent of having good reporting systems that include clear well chosen KPIs that give a succinct sense of how the business is performing and why.
You will need to monitor the level of cash in the bank but you also need to be able to look ahead all the time to see what the cash position looks like for the next 3 to 6 months. But KPIs go way beyond that to understand WHY there might be a problem with the level of cash in the bank and thereby guide solutions to problems that might occur.
Just like the warning lights you need to be scanning for risk factors at all times, and updates on risk should be included in your reporting systems. For example if Brexit poses a risk then this should be broken down into the components of FX risk, tariff risks and regulatory issues which should then be reported on to keep up to date with the state of play.
Monitoring Company Profitability
Other KPIs typically monitor the profitability of the company breaking down performance to focus on the key issues that might change from one week to the next.
Choosing your business KPIs is an important step in designing the reporting process so that you do NOT overload management with unnecessary information, but you DO make sure they have enough information to make decisions.
Revenue, Gross margin % and revenue per employee, or per square foot or per machine hour are all popular KPIs, as these usually work well as measures to monitor achievement of the plan.
Cost KPIs might include overhead per employee, or average product per unit cost, or they might be activity based for example in hotels average cost of cleaning a room.
Understanding Profitability Performance
It is important to also include KPIs that help you understand WHY your revenue or your gross margin are below plan.
For example in a hotel typical KPIs would be capacity utilization and revenue per room sold, so its immediately clear on any night whether a drop in revenue is because the hotel is not full or because the room price has been discounted too heavily.
In a chain of opticians KPIs would include:
- The number of eye tests done on any day as % of the number of possible slots,
- The % of those eye tests that converted to sales,
- Number of items sold in each sale and the average transaction value.
This makes it easy to understand why sales are down – are we not doing enough eye tests or are we bad at converting from eye test to sale. Are we bad at cross selling and up selling – for example when a client buys glasses do we also suggest ski or swimming goggles?
Monitoring Asset Management
If Inventory and/or Debtors are significant in your business then KPIs to monitor these are essential. Inventory days and debtor days are the most popular, The Company should have clear targets for these, which can then be monitored on a weekly or monthly basis.
The aim of good KPI reporting is to channel really important numbers to the management team so that they can scan easily to understand recent performance, diagnose problems and formulate solutions, and preempt having to trawl through lengthy financial reports.
This article is written and reproduced with the kind permission by Moira Creedon of Artemis Consulting