If you don’t know how your business is
doing at all times, you’re headed for trouble. An early warning system? Clearly defined key performance indicators (KPIs).
“A key performance indicator is a metric
that allows you to evaluate whether you are
meeting a certain goal,” says James P.
Martin, CMA, CIA, CFE, CFD, CFFA, a senior manager with Cendrowski Corporate
Advisors LLC. “Identifying what the KPIs
should be for a particular organization is
part of the overall risk assessment process,
which identifies any number of factors that
can stand in the way of success.”
Smart Business spoke with Martin about
how to effectively use KPIs to monitor
whether your business is on track.
How important are metrics?
Very. If a KPI is not measurable, it will not
be useful. For example, ‘word-of-mouth’ is
not a useful metric. And, make sure you
measure things that are relevant. Here’s an
example: By using metrics, an organization
named pets.com — which sold bulk pet
food and the like on the Internet — determined that many shoppers were abandoning their carts at the time of checkout. Why?
Because most of the products were too
expensive to ship as opposed to simply buying them in the store. Pets.com went out of
business because their solution was to provide free shipping. They used a metric that
revealed a problem with their business
model, but incorrectly interpreted it.
So how can a company best define relevant
key performance indicators?
Performance indicators differ from business to business. Having clearly defined
goals to start with will help the company
determine what it needs to monitor. To
assist in the process, use the SMART
acronym; ask whether the KPI is Specific,
Measurable, Achievable, Relevant and
Time-bound. A KPI should be all of these.
How can this information then be used to
improve efficiency?
Key performance indicators are used in
many industries to monitor and improve efficiency, and thus improve the bottom
line. The fast-food industry has the use of
KPIs down to a science. It monitors everything — how long it takes you to receive
your food, how long it takes to cook 100
burgers — the list goes on. The industry
knows what needs to be accomplished to
achieve its goals, and identifies a measure to
make sure it happens.
Another example is a call center. Management will monitor how many people it takes
to answer how many calls per day to determine ways it can improve efficiency.
And how often should a company monitor its
KPIs?
It depends on many factors unique to
each organization. If you’re a company in
turnaround mode with low cash levels in
the bank, you might be monitoring certain
KPIs daily, such as A/R and average sales
per day. If you’re a manufacturing company
tracking production on a piece of equipment you’ve financed, maybe you are analyzing the metrics on a monthly or quarterly basis.
How would something like a ‘balanced
scorecard’ play into the equation?
That means that you have to look at overall objectives holistically. If you only measure factors related to profit (e.g., how many
widgets can we produce by how many
workers in one hour) you might overlook
quality, marketing — all the other elements
that must work in harmony in order to
achieve success. Your KPIs should be setup so that you are monitoring all areas of
the business that tie into achieving your
overall goals.
What about companies that don’t have KPIs
in place; how can they get started?
They do have KPIs in place; they just may
not realize it. For example, they intuitively
monitor payroll — they know how many
hours they pay versus periodic revenue. The
first step to formalizing the process is to
determine what you need to monitor and
measure. Look at the current performance,
benchmarks and target levels. Think about
all the processes you undertake; analyze
objectives and risk conditions/pitfalls to
avoid.
Can accounting software make the monitoring job easier?
The monitoring of KPIs is nothing new —
we’ve been doing this manually for centuries. The prevalence of computers and
today’s accounting software just provides
readily available information. Today’s software enables companies of all sizes to create risk models, define data criteria, set
early warning triggers and alerts, etc.
How often should KPIs be revisited?
At least once a year, as part of the annual
meeting to set objectives for the upcoming
year. Throughout the year, new KPIs may
need to be added and old ones, removed. To
be useful, the KPIs that are already in place
must continue to make sense.
JAMES P. MARTIN, CMA, CIA, CFE, CFD, CFFA, is a senior manager with Cendrowski Corporate Advisors LLC. Reach him at (866)
717-1607 or [email protected] or go to the company’s Web site at www.frauddeterrence.com.
