Key Performance Indicators or Key Predictive Indicators (both KPIs) are a great way to drive the performance of your business. While they are more commonly used for businesses, they can also be used to drive personal performance. This article will focus on the business side, but if the business side does not apply to you, you could personally monitor items like the number of workouts per week, hours worked, reduction in personal debt or increase in saving. As we get into this KPI discussion, it is worth noting that total reliance on KPIs is not without its weaknesses, so they are not the answer for every situation.
KPIs are typically a handful of metrics that you monitor on a regular basis to tell you how your business is performing (performance) as well as how you will be performing in the future (predictive). Some examples of KPIs would be the number of new customers in a given week (performance) or the number of new sales leads in a given week (predictive). You might also monitor certain financial ratios such as profit margins or cash flow. What works best for a business really depends upon the detailed ebbs and flows of the business' industry and the business itself.
You can track your KPIs in various ways depending on your preference and technology tools that you use. The important item in tracking is to make sure that you develop consistency. Some of our clients regularly use spreadsheets to track their KPIs by week or month. Other people use tools that are integrated with their financial systems to automate the process more.
The frequency of monitoring your KPIs really depends on how much your business varies from week to week, as well as how important you think the ongoing monitoring is. Some entrepreneurs monitor their KPIs on a monthly basis while others do so on a weekly basis. I am a firm believer that in most situations, more frequent monitoring is better. But if it comes down to inconsistent weekly monitoring versus consistent monthly monitoring, then I would recommend the monthly option.
The way to identify the best KPIs for your business is to take some time to think about how you judge the success of your business and what predicts future success. Chances are that you may have a longer list after reflecting. From there comes the hard part – whittling it down to the key items. I am a firm believer that monitoring too many things at once is almost as useless as doing nothing at all. You no longer have KPIs, you would just have PIs.
You might assume that since I am an accountant I would be 100 percent in favor of using KPIs to help drive each and every business decision. However, I know that entrepreneurs often need to make educated decisions based on their intuition and gut feelings. KPIs should not turn entrepreneurs into robots or remove those brilliant (or not so brilliant) moves that people make based on what their intuition is telling them.
My goal today was to help you understand how KPIs can be a great way to improve the performance of your business.
Adam Shay, CPA (NC License Number 35961), MBA, is managing partner of Adam Shay CPA, PLLC. He focuses on minimizing taxes and improving the financial results of entrepreneurs, and is actively involved in supporting the Wilmington entrepreneurial and startup community. For more information, visit http://www.wilmingtontaxesandaccounting.com/ or email him at [email protected]. He can also be reached by phone at 910-256-3456.
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