Coming into Christmas it is common to look at the New Year as a business reset, or at least an opportunity to sit back and reflect on what has transpired and plan for the future. Many choose to throw away what wasn’t working last year; take a few days’ break and then charge into 2015 with a fresh outlook and extra energy.
Before throwing anything out, how are you deciding what worked and what didn’t work? What are your Key Performance Indicators (KPI’s), how were they measured and why or why were they not great?
Typical KPIs for an SME are quite broad and were put in place in the early days of the business. They may include sales and profit, cost of sales, stock turns and overtime. Oftentimes they are default settings in accounting software or an ERP (Enterprise Resource Program).
The problem with KPIs is that often they show what happened but they don’t show why it happened. Sales were up 10%. Great. But why did that happen and most importantly, how can I repeat that success?
KPIs have to move with the times as well. 5 years ago Cloud hosting charges or likes on Instagram didn’t exist yet these could now be the most important areas of a business.
Your KPIs may be all over the place but deeper analysis shows that “we did everything right”. This is when you need to sit down with your team and ask the hard questions. If we did everything right, why are the figures not where they should be? Are there market forces at play? Do we know what we are doing?
KPIs can be overrated or completely at odds with the success of your business and irrelevant to your decision making.
Over the past few years I have heard sport coaches issue statements with comments such as:
“Well, all our KPIs were where they should be. Handballs, kicks, tackles, marks, catches, yards, hits. We just lost the game on the scoreboard”.
Here is the danger of KPIs. Focussing on other KPIs that don’t matter is a distraction and can result in self-delusion. Sometimes there is only one KPI that matters. In professional sport, that KPI is called “winning”.
In business things get a little more complex than in professional sport. We don’t have a season or a tournament with a finite end point. We have an ongoing cycle of calendar and financial years, but with the business being an ongoing concern it is not good enough to run a profit up to December 31 and then have everything fall apart on January 1. Your KPIs need to reflect that as well.
Here’s a battle plan for using KPIs and preparing for 2015:
1) Review your KPIs.
2) Historically analyse your KPIs.
If your KPIs are spot on, and reflect what’s good about your business and are pointing you in the right direction, all good. Enjoy 2015. If not:
1) Create new KPIs that better reflect your business.
2) Test them against historical data.
3) Review in a short period of time – 3 months but no longer than 6.
4) Constantly repeat this process. The wrong KPIs are sending your business off course. The sooner you get this under control the better.
Used and analysed properly, your KPIs can be a valuable business management tool. As we roll into 2015, this is the perfect time to make sure your KPIs are really Key Performance Indicators.