If you don’t know how your business is
doing at all times, you’re heading 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, 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 asked Martin how
companies can most effectively use KPIs
to monitor whether business is on track.
How can a company best define its 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 KPIs be used to improve efficiency?
KPIs 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. Fast-food companies know what needs to be accomplished to achieve their goals, and they
identify 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.
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’re analyzing the metrics on a
monthly or quarterly basis.
How important are metrics?
Very important. If a KPI is not measurable, it will not be a useful metric. For
example, ‘word-of-mouth’ is not a useful
metric. In addition, make sure you are
measuring 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? Most of the
products were too expensive to ship.
Pet.com went out of business because
its solution was to provide free shipping.
It used a metric that revealed a problem
with its business model but incorrectly
interpreted it.
What is a ‘balanced scorecard’?
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 set up so that you
are monitoring all areas of the business
that tie into achieving your overall goals.
What about smaller companies that don’t
have KPIs in place; how can they get started?
Small companies 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.
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,
however, 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, Bloomfield Hills.
Reach him at (248) 540-5760 or [email protected] or go to the company’s Web site at www.frauddeterrence.com.
