How many of you would drive a car whilst only looking in the rear view mirror? I'm guessing none. So why do some business owners do the equivalent in their businesses?
By this I mean they rely on their statutory accounts to ascertain how their business is performing. Sadly, statutory accounts are fundamentally flawed. I dont mean they do not add up but rather they are principally designed to provide information to shareholders, investors, suppliers and the Revenue. In fact, everybody except management. Some of the more obvious flaws, as far as management are concerned are:
- They only focus on the past
- They are usually out of date by the time you get them
- They do not show how you performed compared to target
- They do not report on where your income came from, how successful your marketing activities were, how good you were at converting leads...
The list goes on.
"Every aircraft in the world would be grounded if air traffic control relied on the same type of system as companies use to report their information. Current reporting formats provide too little too late" – Quote from an ICAEW publication.
It is fair to say that most businesses do have regular management accounts although these are often based on traditional accounting formats. In other word, other than timeliness, they share similar flaws as a management tool to annual accounts.
So whats the answer? The first thing is to define the key performance indicators (KPIs) for your business. When doing so, I like to focus on four main areas: marketing, operations, finance and HR. Taking a simple example, if you target 50k of turnover per month and usually win 25% of quotes issued. You need to be tendering for 200k of business. Both the value of quotes raised and the conversion rate should be marketing KPIs. Bear in mind that what your business is achieving now is one thing, what you want it to do is another and the setting of targets must reflect this.
Winning the business is only the start and the operations KPIs are used to monitor delivery of the product or service. Whatever is important to your business should be tracked, for example: percentage of deliveries made on time, units produced per day, percentage waste, number of complaints received, etc. Dont forget customer happiness here. If your operations are not making your customers happy, they are unlikely to come back or recommend you.
The financial KPIs are typically the key numbers extracted from your traditional management accounts. These ultimately show the results generated from the above two activities.
Finally, HR. I mentioned happy clients earlier, happy staff are equally important but rarely considered. Areas such as training should be monitored and, perhaps most important of all, working on time for management.
The key to getting started is to keep it simple. Think of three or four items key to your business success, set targets and start tracking. You can add more later. If you would like further information about KPI monitoring systems, please contact Darren Austin.
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