Q&A: Key performance indicators

a man places the letters KPI on a desk

KPI - key performance indicatorsEmma Warren of mentoring, training and business development services provider Portfolio Directors explains how key performance indicators can help small businesses

What are Key Performance Indicators?

Key Performance Indicators or (KPIs) are usually the key figures calculated or contained within your financial data. Working with them reveals how well a business is performing. 'Key' stands for what is important, 'Performance' looks at how well you are doing and 'Indicators'  operate as in a warning system. They're very useful.

How can Key Performance Indicators be used?

KPIs monitor specific performance and measure or compare it. For example - this month's sales against last month’s or new customers today compared to yesterday or the same day last week. They can also be used to track trends and changes, for example, staff absence rates.

Give me a real-world scenario…

If you must find five new £2k customers per month to achieve your sales target and you're only adding one, your KPI can trigger a review to see if your sales function or sales team is underperforming. Alternatively, the market might have changed, the marketing function of the business may be underperforming or your budget might be unrealistic. The important thing is that your KPIs enable you to find out and take action before it's too late.

Which KPIs are common?

Sales, gross and net profit and costs. These can be daily, weekly, yearly or even hourly for some businesses. To be effective, they must be reported and assessed regularly.

How many KPIs should I select?

This depends on your business, but aim to select fewer of the right KPIs is better than too many of the wrong ones. Having the right KPIs helps to keep people focused on key areas. Some KPIs are sector- or trade specific. In retail, for example, your KPIs might include sales-per-employee, sales-per-square-metre of shop floor, customer complaints, etc. There's no point measuring something that won't help you judge your performance. If you stick to the headline numbers, as detailed above, then you won't go far wrong. Don't overcomplicate things.

How can I work with KPIs effectively?

It begins with knowing where you are trying to take the business, then you can set goals and objectives. You need to work out what you will do to achieve them - that's your strategy. Your KPIs should help you monitor performance/progress as well as the success of your strategy. They also form an early warning sign if things aren't functioning as you need them to.

How often should I review my KPIs?

This depends on what they are and your type of business but, as a general rule, review them at least once a month. You also need to keep KPIs in the forefront of employees' minds so everyone remains focused on the key business objectives.

How do I use KPIs with my business plan?

A business plan determines the overall direction of the business and key steps that need to be taken. If the business plan is to be achieved then out of this should come an action plan made up of objectives. KPI's can be used as a complementary tool to judge performance – it’s as simple as that.

So KPIs are very important then?

They are. They won't solve problems for you, but at least they'll show you where problems exist. If used correctly and setup against the correct indicators, they can be a very useful and immediate way to check progress and highlight problems without having to trawl through reams of data. KPIs also help keep all team members focused on what’s important to the business.

Written with expert input from Emma Warren of Portfolio Directors.

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