Understanding your key performance indicators – and managing your critical numbers

Measuring your performance over time is what keeps you informed and in control of your business.

And having your systems set up to track, measure and deliver key performance indicators (KPIs) is the bedrock of understanding your ongoing business story.

But what KPIs should you be looking at? And what do they actually tell you about your company’s current health?

Know your critical numbers

No two businesses are exactly the same. And that means that the numbers you view as ‘business critical’ will be unique to your organization.

The industry you work in, the type of product or service you deliver and the overall size of your operation will all define which of your business information numbers are the fundamental or ‘critical numbers’ that you want to measure over time.

These are just a few of the possible numbers that may be the key drivers in your business:

  • Cash flow – knowing your predictable costs and income and the current liquidity of the business.
  • Acceptable level of profit [Link to May blog 3] – having a clear view of the minimum acceptable level of profit within the organization.
  • Labor Efficiency Ratios (LERs) – being aware of the impact of salaries, reward and remuneration on your operating expenses.
  • Sales per month – knowing how many new contracts the sales team have signed off this month and over the rest of the year.

Part of the good management of your business is having a very clear idea of which numbers are critical to your success, and setting up processes to track and measure them in your KPI reporting.

With KPIs tracking your critical numbers, you can hold your business stethoscope to the beating heart of your organization and hear whether the company is sounding healthy, or is in need of a speedy course of profit medication.

These are the numbers that give you hope and the leading indicators into how you’re running your business.

Leading vs lagging indicators

When it comes to KPIs, there’s a crucial distinction that is incredibly important to understand – and that’s the difference between leading and lagging indicators.

  • Leading indicators – these are KPIs that give you numbers on future activity in the business. So these could be the number of agreed (but as yet unfulfilled) sales in your manufacturing company or the number of future bookings at your beauty salon.
  • Lagging indicators – these are the KPIs that tell you about historic activity in the business. So, to use the same examples, this could be a number of actual deliveries made for the manufacturing company or the number of manicures delivered by the beauty salon this month.

Let’s imagine your run a party room business for kids. There are all sorts of inflatable things for the kids to jump on, bounce on and generally roll around on. Kids and parents alike love your business: but that company’s long-term success depends on securing the right number of appointments.

What this business needs is a measurement of appointments at any given time in the year, so they can make sure they’re profitable.

  • A KPI that shows the backlog of booked appointments is a leading indicator – i.e. the appointments booked but they’re still in the future.
  • A KPI that shows the number of parties the business has given is a lagging indicator – i.e. the parties have happened and are in the past.

In this particular kind of business, you don’t really care about historic bookings, so the lagging indicator doesn’t hold much value for you. But the leading indicator – the bookings that are still yet to take place – is hugely important.

When you know the future pipeline of appointments, you know the predicted sales you’ll make, the revenue it will generate, the costs you will incur and the end profit your appointment pipeline will generate.

And that is critical information for a business of this kind.

Counter KPIs

Delta Airlines set one of critical priorities to be on-time push away from the gate. Everyone wants to be on-time, so what’s the problem?

Delta, and we, should always ask the question: If we succeed in achieving our goal (of on-time push away for Delta), what else could go wrong in meeting this priority?

In Delta’s case, it meant that there was an increase in the number of bags that did not connect with passengers – thus a group of very unhappy passenger who, although they were on-time, arrived without their baggage.

Had Delta asked the key question, what else could go wrong if we achieve the goal, they would know to track the counter KPI – delayed baggage.

Counter KPIs are powerful.

Talk to us about defining your KPIs and critical numbers

Holden Moss’s vision is always to help our clients get the best possible control over their business. And a big part of this is providing business owners with the right KPIs and the right information to drive their decision-making.

One solution that helps us enormously with this is Fathom, a nifty reporting, and forecasting tool that plugs nicely into your Xero online accounting software to give you breakdowns of your sales, cash flow and profits in truly drilled down detail.

If you’re looking to get a handle on your critical numbers, but don’t know where to start, come and have a chat with us. We can give you a sample Fathom scorecard so you can see how these leading and lagging KPIs can work for your particular business model.

Contact your local Holden Moss office and let us show you what’s really going on in your business and the KPIs you should be focusing on.

Written by

Steve Moss, CPA is a partner at Holden Moss CPAs and loves helping businesses and their owners grow to be the very best they can be. Our other offices include Raleigh, Oxford and Warrenton. We are a little different at Holden Moss CPAs. While we still provide traditional tax and accounting services, years ago we realized many clients wanted help in running their businesses and were hungry for ideas, solutions, strategy, and execution. In response, we expanded our skill set and joined Ran One, a global network of business consulting firms. Our membership with Ran One gives us access to proprietary resources and analytical software to help our clients grow, become more profitable and valuable, and have the lifestyle they desire. Now, blended into the fabric of our normal tax and accounting needs, we are focused on our clients’ businesses in a very different way. While our approach is not right for everyone, for those whom it is, incredible results may be obtained. Whether you have a new, or established, business, or for those in transition of selling or retiring, or for those who simply need to develop an exit strategy or succession plan, our unique approach to client service may be the edge you need.

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