Examine any business and you’ll find a relatively few specific goals and objectives to focus on. Think about your own business. What are your specific goals and objectives for the next month, quarter or year?
Examples include increasing sales by 5 percent, reducing employee turnover to below 25 percent, shipping 99 percent of orders on time, or retaining at least 95 percent of your customers.
Measure what matters most
Key performance indicators (KPIs) are quantifiable measurements that help determine whether the business is on track to achieve its strategic goals and objectives.
KPIs reduce the complex nature of business performance to a small number of key indicators. Don’t get carried away with a zillion indicators. Keep it simple so that your KPIs are meaningful and tie directly to business goals and objectives.
Why should you measure performance? For at least three critical reasons: To learn from the information you gather so you can use it to make informed decisions, to set goals and objectively assess the performance of your business, and to convey positive and negative variances between those goals and your actual performance.
How to design KPIs:
Determine the key areas that help the business generate revenue
Choose activities where the results can be measured on a regular basis
Consider activities where more than one person impacts the results
Clearly define the goal with objective elements
Use the KPI to help identify the performance drivers
The more precise a KPI is, the more likely it is to be useful. For example if your goal is to increase sales, it’s not enough to simply set a goal of changing sales volume each month, without quantifying the change. If your goal is a 10-percent increase in sales, say so.
Likewise, if your goal is to reduce employee turnover, defined as the total number of employees who resign or are terminated by your total employee count, be specific (reduce turnover to below 10 percent).
Here’s an example of how key performance indicators helped managers of an arts & crafts wholesale distribution company. They listened to customers to identify their top priorities.
Customers wanted prompt order shipment, items ordered to be in stock (which translates into a high fill rate), and shipment accuracy. In other words, customers wanted picking errors to be minimized.
Here’s how the distribution company turned those customer expectations into key performance indicator goals:
• Same-day shipping of all orders placed by 3 p.m.
• An overall “fill rate” of at least 95 percent
• Picking error rate of 2 percent or less
The company set other goals/objectives for the warehouse and purchasing departments, which managed the level of inventory for the 40,000 items the company stocked.
To help ensure that warehouse staff productivity did not fall below certain levels in an effort to reduce picking errors, the company set a warehouse productivity goal of picking a minimum of 200 line items per hour.
It would be easy for a purchasing department to accomplish the goal of having a fill rate of at least 95 percent, simply by overstocking the warehouse with merchandise.
So the company set a second goal as a check and balance, to turn over its inventory least 3.5 times per year
Regular monitoring of your business KPIs and sharing the results with your team will better enable you to meet your stated goals and objectives. It will also reinforce your commitment to the team and show your team how they impact the success of the business.
Charles Yacoobian is a C.P.A., and a Business Advisor with the Small Business Development Center (SBDC) hosted by College of the Canyons (COC), serving Northern Los Angeles County – the Antelope, San Fernando, and Santa Clarita Valleys. The column reflects the author’s views and not necessarily those of The Signal. For more information about how the SBDC can help your business, please call 661-362-5900, or visit www.cocsbdc.org.