What KPIs Should I Track?
By Jon Orr, Managing Director, Optimas Financial & Accounting Solutions
As a business owner or manager, you need to identify what information you need to measure, so you can assess how well you’re meeting your strategic goals. These performance measurements are called KPIs – or Key Performance Indicators – in consultant-speak.
Your KPIs should always follow the SMART criteria. It should be Specific, Measurable, Achievable, Relevant and Timely.
For example, say you manufacture widgets, and you want to get to $25 million in revenue. How will you get to that goal? What data can you track to help you get there?
Well, for starters, you’ll have to reduce the number of defective products you produce since you can’t sell those. Your defect rate would be a KPI for your organization.
However, setting a goal of “reducing defects” isn’t specific enough. Can we set a goal of zero defects? Can we measure this? To do so we’ll need a system to track defects. Is the goal of zero defects realistic within our timeframe and cost structure? Perhaps a 1% defect rate might be more realistic and comparable to our competition. Does our goal of a 1% defect rate relate to our overall strategic objective of achieving $25 million in revenue? What is our timeframe to achieve a 1% defect rate?
There’s a huge range of possible KPIs that might make sense for your organization. From a finance or management perspective, revenue growth rates are a strong KPI to track, as is gross profit margin and net income margin, which show you how profitable your business is. How profitable is each line of widgets you produce? Which lines should you focus on – selling more of your top widgets or beefing up sales of slower-selling widgets? You may decide if a product line has a profit margin lower than 10%, the product line should be shut down because such underperforming products divert your time and attention from more profitable product lines.
Utilization is another KPI you may decide track. How often do you use your manufacturing equipment? Do you have excess equipment or not enough equipment? Could you add a new line of widgets that would help you better utilize your equipment and allow you to sell more?
This only touches the surface of the many KPIs you may choose to track. Other popular KPIs include:
- Revenue per customer
- Revenue per employee
- Market share
- Market growth rate
- Customer attrition
- Uptime/availability of networks
- And much, much more!
Always design KPIs that will track with your goals, to keep you focused on the right areas and to allow you to set accurate targets and to reliably track progress. Also, spikes and trends in these KPIs will alert you to potential problems that you need to investigate – or to successes you can build on.
You’ll also need to make sure the KPIs you’re tracking are sufficient. For example, if you’re only tracking revenue growth but you’re not tracking market share, you might be thrilled with your 5% growth rate. But if your competitors have just grown by 10%, you’re not doing as well as you thought.
It’s critical that you track the right data and enough data to give you an accurate view of your big picture. By tracking multiple KPIs and looking at them together, you’ll be better able to identify problems early on, manage your business, and achieve your goals.
© Optimas Financial & Accounting Solutions
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