Key Performance Indicators - the write site

You all spend a lot of time and money in getting your annual accounts prepared and squared away ... who could forget that! Those accounts are helpful for keeping the tax and bank people happy, for selling your business and for bringing in new investors/partners.

However, even the most efficient of you don't have your annual accounts done till two months after the end of the financial year - 14 months after that year started. These accounts do have their uses (as above) but you cannot run your business on a day-by-day basis from them - they're too blunt an instrument for such a fine job.

Many of you do (or have done) monthly accounts and these are, at your most efficient, done three weeks after the action, so to speak. These monthly accounts are a finer tool for the job but, like your annual accounts, take a lot of effort to prepare - accounting for debtors and creditors, counting stock (inventory) and so on.

The huge effort and cost in preparing accounts and the fact that they're available long after the action, is the main reason KPI's were invented.

What are KPI's
KPI does not stand for Kerry Packer Industries! KPI stands for Key Performance Indicator - a big phrase that means that you choose, in your particular business, what the key or essential ingredients are to making profit. Every business is different so KPIs vary.

KPIs aren't always financial indicators. A KPI is a way of measuring a particular business process, a bit like evaluating how well the company is doing in that particular area. By recording and analysing KPIs company-wide, the business owner can see at a glance which processes need attention.

How KPIs can help
KPIs provide the detail measures of your business that purely financial measures can't. For example, what use is a great profit when you're losing customers hand over fist through slack customer servicing? If, however, you were using KPIs to measure ...

• What customer deadlines have been missed?
• What is the conversion rate from quotations to sales?
• For which department were customer complaints received?
• What is the direct cost of complaints?

... then you would already have seen why you were losing customers, how much it was costing you and exactly where you would need to start making some improvements.

Sample Customer KPIs

• What would be the impact if a major customer failed or left the business?
• What percentage of sales is being exported?
• What is the level of customer complaints?
• What delays are being caused by the Quality Assurance System?
• What are the results of customer surveys undertaken?
• What customer deadlines have been missed?
• What is the percentage of complaints to sales per department?
• What is the number of new customers per department?
• What is the average sale amount to new customers?

Surviving in business today is more about measuring the value you add [see previous article Adding Value to Customers]. This means measuring how well you are performing against your business goals and objectives and, significantly, where you can improve.

Your accounts will tell you if you're making a profit or not and they may give you an idea of where problem areas may be. KPIs, on the other hand, tell you exactly what is going wrong, where it is going wrong and they usually help you in deciding what to do about it.

Ask me if you want to set up useful KPIs for your business - particular KPIs will be more helpful than others, for your business, and there are simple ways of instituting and analysing them.

When you look at your financial statements, you might wonder why you go to all the trouble of employing staff. The only two places you see mention of employees are as expenses (wages, salaries, training, canteen, uniforms, staff amenities etc) and as liabilities (wages owing, holiday pay owing, PAYE owing etc). They either cost you or you owe them!

However, there is more to your people than just costs and debts for, if there weren't, you wouldn't employ them! Without them, your business is never going to:

1. Grow beyond a one-person enterprise,
2. Allow you time off, or
3. Grow large enough to be a substantial asset to sell, when you get too old and/or crotchety to enjoy it, to afford you a retirement in the luxury you deserve.

None of this would be possible without staff and yet their benefits to you and the business are not shown anywhere in the accounts.

A few multinational accounting firms realised, some twenty years ago, that staff were not just a cost and a debt, but, more than anything else, a huge asset. They have been trying, all these years, to perfect systems for valuing staff and showing them as an asset in their Balance Sheets - or Statements of Financial Position, for those of you who like big words! In these systems, employees are rated, based on things like their qualifications, experience, particular expertise(s), charge-out rate and other things, including their health which can affect an employee's long-term benefit to the firm. These ratings are then converted to dollar values in the assets of their balance sheets.

Some people may find it insensitive - even obscene - to put dollar values on people. These employee valuation systems are not perfect but they are these particular accountants' best attempts to put a value, in the accounts, on the biggest asset of any business enterprise - people.

No matter how clever these employee valuation systems are, they're for accountants and, at the moment, very complicated and time-consuming to use. However, there are more simple and effective ways that you can see:

1. Where things are going well with your staff,
2. Where things are not going well, and
3. Give you pointers on what you can do about them.

KPIs for Your Employees
These KPIs are simpler tools to use than the above employee valuation systems and they give you the information much sooner - in time to do something about it.

As with all other KPIs, these ones don't only cover financial data - they also bring in ages, staff numbers, processes (e.g. interviews), meeting outcomes, resignation reasons and other non-financial data.

By narrowing down your most pressing employee concerns - is it their health, their qualifications/training, their dissatisfaction for work or whatever? - you can design KPI measures that give you management tools to help your employees help your business profit better. Below are some examples of employee KPIs.

• What are the ages of employees?
• What percentage of employees will retire over the next three years?
• Number of employee resignations?
• What were the reasons for staff resignations?
• Were any exit interviews carried out?
• How many employee sick days were taken?
• How many employee accidents occurred?
• Number of employee training hours achieved?
• Staff meetings held - outcomes of these meetings?
• Number and cost of potential accident claims?
• Sales achieved per employee?
• Gross profit earned per salesperson?

Remember, you can easily come up with KPIs that are specifically tailored to your business needs. If you need any help in doing that, don't hesitate to call me and I can steer you in the right direction.