Monitoring Your Business: Key Performance Indicators and Drivers
We look at how businesses can find and monitor key indicators of its performance, and utilise this data to drive success
As any entrepreneur will tell you, no successful business was ever run without good decision making – and you can’t make good decisions that aren’t based on good management information.
To collect this, it’s essential that every business have management accounts, so that they can keep a close and constant eye on profitability and cashflow. But for new businesses in particular, it’s easy to get lost in the fog of numbers and metrics. Identifying and selecting key figures that indicate the performance of your business – Key Performance Indicators (KPIs) – can help you beat yourself a path to the data that really matters.
In order to really boost your performance, you also need to identify and track the key ‘drivers’ of your business. A driver is anything that majorly affects your business performance.
Here we look at how to identify your KPIs and drivers in the most crucial areas such sales, costs, and working capital, and how to present and utilise his information.
What key indicators can I use to monitor performance?
The most commonly monitored KPI areas in business are sales, costs, and working capital.
Finding and making use of the KPIs in your sales
There are several ways you can make use of the KPIs from your firm’s sales; one way is by monitoring your enquiry levels. This will give you forewarning about any oncoming spikes or slumps in your sales and it will also assist you in seeing where your enquires are coming from – this will tell you which marketing campaigns are working or not working, and it will help you to forecast your turnover by calculating an enquiry to sales ratio and an average sale size.
Another way to measure performance in sales is by building an orderbook to record the interest of buyers and sellers. If you then compare the total value of your order book with breakeven sales for a month you can build up an ‘order book cover figure’.
Finally sales can be examined via key sales figures, when doing this keep a close watch on your best sellers, the sales of your priority products (those with the best margins/payment terms), the performance of your salespeople and the changes in your conversion rates (ratio of leads to sales).
Finding and making use of the KPIs in your business costs
You need to keep as close an eye on your costs as you do your sales (especially if you’re afraid of what you might find). These should be tracked as closely and often as possible – weekly is ideal, daily is even better.
The key way to do this is by identifying the key variable costs, and then working out what causes them to rise and fall. Watch your gross profit margin – see what affects it, and try to keep it healthy as falling margins can be caused by many things (higher input prices, a changed product mix, production inefficiencies and discounts).
Finally group different cost types into cost centres, for instance a warehouse and delivery business could group its direct costs into warehousing and delivery costs. You can match these costs with the revenue from each mart of the business, and see how profitable each is and related overhead items (phone charges, stationery, etc.) can be grouped into a single cost figure.
Finding and making use of the KPIs in your firm working capital
If you want your business to be flexible, and give it room to manoeuvre, you need to generate as much cash as possible. To do this you need control over your working capital – stock, creditors, debtors, and work-in-progress.
Begin by finding out how much extra working capital you need i.e. how much you’d need to fund an extra 10% increase in monthly sales. If you can’t make this figure, you might need to say no to large orders etc. After this make an ‘aged’ list of debtors and creditors and use this to track and highlight overdue, suspect, or simply large customer payments.
Finally work out your stock turn figure – the ratio of cost-of-sales to stock and see if it decreases and why – it will tell you if you’re purchasing stock you cannot sell. Breaking down this figure into separate product categories can more accurately show you where the problems are.