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How Key Performance Indicators Can Help Your Business

Having measurable goals can help your small business stay on track and be successful. Key Performance Indicators provide a simple and measurable way to evaluate successes in your company.

Often used in larger companies, Key Performance Indicators (KPI) can provide much benefit to small businesses as well. They serve as a measure of performance for a particular task completed by an employee. Teams may work together to achieve projected KPIs.

For example, if you operate a shoe factory, one Key Performance Indicator might be zero accidents in a 6-month period. All your workers strive to meet this goal by practicing safe use of machines. In a business service, your KPI might be to increase the average monthly retainer from new clients. Whatever the KPI, it should be a goal that meshes well with overall company goals, and is important for your company.

Why Use KPIs

Key Performance Indicators provide structure to goals, and help focus on areas other than finance as measurements of success. You can have KPIs in each part of your business: marketing, HR, production, sales and accounting should all have their own KPIs to measure.

KPIs make it easy to judge performance in a given area. For instance, if accounting is consistently failing to meet the KPI to reduce time to resolve credit balances, management can see that extra attention should be given to that department. Conversely, if the supply chain has been consistently reducing the instances of stock being sold out and has increased product line sales, management can determine that this department might deserve an end of year bonus.

With KPIs clearly defined, a team can easily determine what it needs to do to work together to achieve common goals.

With KPIs clearly defined, a team can easily determine what it needs to do to work together to achieve common goals.

Creating KPIs

If your business has departments, ask the head of each department to make a list of goals for that department. Next, s/he should list the:

  • Objectives: what s/he wants to achieve
  • Measurement: how the department will measure the objectives
  • Target: what exactly and when the department will aim to achieve the goals
  • Initiatives: actions to achieve the target

After reviewing all departments’ KPIs to ensure that they work well together and do not conflict (for instance, if Finance wants to increase sales by $10,000 a month and Sales set its KPI to increase sales by $20,000 a month), give the approved KPIs back to each department head to divide amongst their teams. The team members should each be given initiatives to help achieve the target. If the target is to reduce receivables for 85% of outstanding invoices, each accountant should take part of that work reach the goal.

Each department head should create a spreadsheet to visually map KPI, the initiatives and the owner of each. A simple green box or smiley face can illustrate progress when weekly meetings are held. You should be able to quickly review this document for each department to understand its progress on the KPIs.

If you have many departments, create a Balanced Scorecard to better manage the many KPIs your company will have, and to track results.

Here is an example of a good KPI:

  • Objective: Increase average client retainer
  • Measurement: average all client retainers over 6 month period
  • Target: Increase average client retainer to $3,000/mo for 80% of all new clients
  • Initiatives: Raise prices for services, train sales staff on new products to sell, network with medium sized business owners, cold call medium businesses

KPIs should have a fairly short life of just a few weeks or months. After this period when the KPI has been measured, the same or similar KPI can be set up for a team, and efforts should be reset. For instance, if the KPI was zero accidents in the factory and there was one, reset after the period and make zero accidents the goal once again.

 
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