Measure business performance by developing the right key performance indicators (KPIs). Without indicators, it is difficult and challengiong to realize your business goals and to improve small business performance.
There are a number of ways to measure business performance. The ones used most often are financial statements and sales results however, depending on your business, there are many other ways of measuring how your business is doing; ways that will help you better manage to your desired results.
Why is developing your key performance indicators (KPIs) so important to your business?
Because you need to track performance in order to improve it.
And because you need to clearly understand what the most important indicators are for your business (indicators such as new accounts, orders, estimates, time to deliver, non-conformance or spoilage, employee turn-over, or ?).
As a small business owner, developing key performance indicators (KPIs) (your business-specific indicators) needs to be a priority. KPIs are a way to track, measure, and grow your business. If you want good results, you have to focus on understanding how your business is doing against the performance measures you have set up.
These indicators will keep you focused on what's important to your business and will measure business performance against your small business plan goals and objectives. Through a gap analysis, you can highlight the difference between where you are, and where you want your business to go (or be).
Measuring business performance will keep you focused on the strengths and weaknesses of your business. When you know where to focus your attention, you can use specific problem solving techniques and decision making tips to help minimize areas of weakness.
There are other popular business measurement tools (such as Balanced Scorecard, Results Based Management, and more) available, however KPIs are relatively simple to develop and track and therefore are relatively easy to use in measuring business performance; and in providing a near-term business outlook.
KPIs measure what you have defined as your critical business success factors to track your company's direction, strategy and achievement. Each business needs to develop their own unique KPIs.
Developing Key Performance Indicators
Some Examples (in a manufacturing plant):
Daily number of job quotes (compared to estimated daily number based on history and sales plan)
Daily number of orders (compared to estimated daily number based on history and sales plan)
Daily volume of orders (by sales $ and or by volume (weight, piece, length, etc.)
Daily volume of orders scheduled into the plant (for production that day)
All of the above should then be tracked by week or month or year-to-date and compared to the same period for the previous year or years. You can also compare to your forecast numbers (that is, comparing to your future, not just the past).
Also Measure Business Performance in other areas:
The time required to complete a quote (e.g. target is 2 hours and actual is 1.5 hours to complete (and send) a quote);
The actual date shipped compared to 'promise' date;
Develop a customer satisfaction scorecard (first develop a survey program to check what customers think and feel about your performance)
Percentage spoilage or non-conformance compared to customer specifications; and much more;
Percentage of business with existing customers and how that is being maintaining daily or weekly or monthly (e.g. a dip in that percentage should be investigated and acted upon).
Additionally, financials such as cost of goods sold, revenue, net profit; and financial ratios, such as gross margin, return on investment, return on equity, etc. all need to be considered in developing key performance indicators and an approach to measure business performance.
However, do not become overwhelmed with measuring and tracking too many indicators. Develop a one or two page Daily Hot Sheet of indicators that you feel are most important to you and to your business success. Then measure and track those.
Once you start measuring and tracking, you need to move to acting on what you find. Use your strategic business plan to help you focus on the activities that are most important to your business.
Make sure that these KPIs are aligned with your goals and objectives - as you've defined them in your business plan or strategic plan. And make sure that when your business changes, or your goals change, that you update, and perhaps change, your indicators. However for the most part these indicators should be rather stable and important to the business; you want to be able to develop a history or track record with them so that you can start seeing warning signs or good news clearly.
In other words, if you have targeted a KPI for on-time shipping (which is shipping on or before your promise date) and your KPI Hot List shows that you've been late 30% on shipping your goods. Then you need to take action. First, drill down into the information and find out whom you've been late with; it's really bad news if all the lates are with one customer.
Then find out why. Are your standards wrong (are you allowing enough time to manufacture)? Are your supplies back-ordered? If you're a distributor, are you relying too heavily on one supplier who consistently short-ships? Are you short-staffed? (If so, what's your staff turn-over rate - too high signals other problems.)
Whatever the reason for non-performance or under-performance as compared to your business plan or business plan outline once you've found out why; do something to change it!
For Example, change your manufacturing standards to accurately reflect the time need to produce the item (and then correctly quote the time to do the job); find out why supplies are back-ordered: do you need to re-order sooner, keep more inventory, spoil less of that item; do you need a secondary supplier or a new primary supplier who doesn't short-ship your order?
If you're not tracking your key performance indicators, these poor performances are often masked and not identified.
Loss of orders and lack of business is often attributed to poor market conditions or high pricing or a bad sales representative, when the reality is something potentially more serious and more pervasive throughout the organization.
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