Key Performance Indicators
Key performance indicators (KPIs) are shortcuts and tools to give managers a quick grasp of essential activities enabling greater control. Whether a manager runs a business, not-for-profit, governmental unit, department or a small group, KPIs can help the manager be more effective, achieve goals and better serve customers, stakeholders or others relying on the organization.
Managers need to develop the KPIs that will help them the most. This development should be based on what they are doing now (with some tweaking) so they get four or five numbers daily that will not take more than three minutes to absorb, assess and activate changes, if necessary. Transparency and sharing the KPIs also will draw team members into the process.
Examples of KPIs for most organizations are: daily reports of the previous day’s total cash receipts, disbursements and balance, sales and accounts receivable, purchases and total payroll. Here are some illustrations for specific operations:
- Hotels might want to know the occupancy percentage and average room rate
- Restaurants should know the covers and table turnover
- Pounds shipped and order backlog for manufacturers
- Chargeable hours and the percentage of chargeable hours to total hours for a service business
- Bed count and average stay for hospitals
- Total listings and closings for realtors
- Orders received and shipped, acquisition cost per order or hit ratio from inquiries for web-based sales companies
KPIs should be distinguished from dashboards, balanced scorecards, financial statement supporting schedules and auxiliary reports. The latter are important and necessary, but are not and should not be used as KPIs. KPIs need to be presented in a way so there can be intense, laser-like focus for the two or three minutes they are absorbed. One of the problems in developing KPIs is the tendency to include too much information, making the KPI a mini-financial statement requiring days of training, and the overloading of information thwarting actual benefits and true focus. KPIs should be kept short and essential.
KPIs drill down to everyone in an organization having management responsibility. They are not reserved for the top managers, and should not be shunned by top managers, because they can also be used by those at the lower rungs of management.
A manager is responsible for numerous activities in his or her organization. What a manager does not have is time for an exhaustive daily review of financial data. However, the right KPIs will provide the control needed. KPIs are not a substitute for complete financial reports, and those need to be reviewed, but not daily in three minutes.
Each business has their own personality and character, and developing KPIs is a personal process for each manager. Many companies in the same industry appear similar but are completely different and its managers need to determine the KPIs that will deliver results for them.
The goal is to develop four or five numbers that can easily be supplied daily that will give the manager a handle and control of the activities. Once received, questions, adjustments or inquiries can be made to hone in on problems or so that successful actions can be replicated.
Reprinted from the WS+B Journal, Summer 2013 issue. Link to entire issue: https://www.withum.com/pdf/The-Journal/2013/wsb_journal_summer2013.pdf