Key performance indicators (KPI’s) are internal measures you can use to improve your business.
Think of them like a system of levers – if you pull and push them in the right way, they can lead to higher turnover, lower expenses and more profit.
How does it work? First, you’ll need to list the common elements in your business that contribute to turnover, expenses and profit. Some examples are:
- Cost of materials (as a percentage of turnover)
- Cost of labour (as a percentage of turnover)
- Hourly/daily cost of labour (dollar amount)
- Average project rate (dollar amount)
- Average project margin (as a percentage)
- Cost of finance (as a percentage of turnover)
- Return on net assets
- Debtors days
- Cost of rectification
- Actual vs. quoted costing (dollar amount)
- Actual vs. quoted time (in days or hours)
- Days lost
- Customer satisfaction
After you make a list of areas to measure, review your profit and loss statements from the past six months to figure out average figures for those areas. What is your average cost of materials? What is your average cost of labour? Write it all down.
Once you have your historical numbers, you can use these to set new KPIs. Ultimately, you want your profit and turnover to go up, so you might set a KPI for the average amount you charge for a project to increase by five per cent. At the same time, you want your expenses to go down, so you might set a KPI for your cost of materials that is two per cent lower than the percentage you currently spend on materials.
While the focus of this article is your business’s financial health, you can set KPIs in every part of your business. There could be KPIs for the number of sales calls that need to be made each week, or the number of quotes you produce and possibly more importantly, the percentage of quotes you convert to sales. You could even have KPIs for your debtor collection process! Whichever ones you choose should be based on what is important in your particular business and the key areas that drive your business.
So write down your new KPIs – these will then act as a scorecard for your progress towards your goal.
If your KPIs are moving in the direction you want, that’s fantastic! If they aren’t, then it’s time to consider whether you’re taking the action you need to make them happen, or if they are realistic KPIs in the first place.
Like any financial measure, you should not just set them and forget them.
Always measure your actual performance on a regular basis and then review the KPI’s themselves to continually refine them and sharpen your focus and action. If you need some help, don’t hesitate to get in contact.
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