Key Performance Indicators, or KPI’s, are simply measurements of important business activities which are key to the success of a business. Typically, these are part of a non-accounting reporting system. Many business owners are more comfortable relying on instinct and trusting the practices they already have in place, rather than creating more reports and complication. After all, sometimes high volumes of information and seemingly arcane data-points can cause more confusion than financial clarity. Although the use of KPI’s are not very common with many small businesses, they should be. But many business owners don’t have much experience or interest in data collection and analysis. Continue reading to understand some basics of KPI’s for small business and how to implement them.
Accounting and bookkeeping measurements report critically important information, but these measurements are frequently not enough to monitor the whole of the business and provide a holistic view of the situation. Perhaps one example might be the issue of Quality Control in an online retail business. One KPI measurement might be the percentage of errors compared to the number of packages shipped. Just about any online retailer who ships their goods will tell you that this is a hugely important percentage, particularly if there is a shipping department on the payroll. Another might be inventory turnover, which measures how often you are able to sell off your entire in-stock inventory in a given year. This KPI simply indicates the ability of your business to generate sales and increase revenue.
How might one identify and implement a KPI tracking system? Attempts to implement a system of KPI’s might fall on the bookkeeper or accountant. If they have a good operational understanding of your business, or have other rolls within your business, they might be able to manage this for you. If not, you’ll need to do your research and there are plenty of helpful articles to be found online about small business key performance indicators. Here are a few basic steps to follow in implementing KPI’s into your business:
1. Identify what is important. What are the core processes that drive revenue? What are the steps in these critical processes?
2. What are the success factors in these processes, and what roles come into play. Whose responsibility is the role or core process?
3. In this step you should come up with 1 or 2 KPI’s for each role, and decide if/how this KPI can be objectively measured. In the beginning, you might try to work with data that is already on hand. Perhaps these numbers simply need to be compiled and analyzed.
4. Choose the KPI’s that are most essential to the success of your business.
5. At this point you need to set some performance benchmarks or levels, and establish review dates or intervals. These KPI’s should also be achievable, and consider setting these targets by consulting with the very team member who will need to achieve them.