Measuring the Critical: Key Performance Indicators
So having read my last three posts you’ve taken decisive action and found yourself a good accountant. One of the most important things your new accountant should be doing for you is to set up some decent systems so that you can find out what’s happening in your business before it’s too late to make a difference.
It’s easy to get lost in the plethora of reports that are available from decent systems so it’s important to focus on the key things in your business: those which are critical to survival and success. These are the things that MUST go right for your business to be able to deliver your core products or services in a cost-effective manner which meet or exceed the customers’ needs, which are often called your Critical Success Factors. Having worked out what these are, you can now start measuring these since what you can measure you can manage and then work out how to improve. Often, these are few in number so it’s normally possible to restrict the reporting to 8 or 10 what are known as Key Performance Indicators.
Let’s use a real example, a trade client of mine whose systems had not kept up with the growth in the business, where sales invoices were being sent out to customers several months late (if at all), the business was running out of cash so creditors weren’t being paid and huge amounts of working capital was tied up in work in progress and inventory, job profitability was mixed at best and labour productivity has slipped badly.
After I had helped recruit a new administrator and suggested and assisted in setting up some decent systems including timesheets, automated billing, perpetual inventory and job costing all by-passing the business owner (who previously had tried to do everything himself) we started to monitor, amongst other things, the following:
- Labour productivity. By setting up timesheets (linked to the invoicing module) and both chargeable and non-chargeable activity codes we were able to keep track of both overall and individual employee productivity. Having set a target level of productivity, this enabled the business owner to focus on productivity beneath the required target.
- Work-in-progress. For the first time, the amount of money tied up in work-in-progress could be quantified which was an eye-opener in itself. Targets were set for both business-wide work-in-progress days and individual job work-in-progress which enabled not only prompt billing but also the identification of potentially unrecoverable work-in-progress so this could be investigated and then billed or written off.
- Accounts receivable days. Customers over 30 days were reigned in or sacked.
- Inventory days. We now knew what we had in inventory which enabled the business owner to reduce the overall level of inventory and identify slow-moving items surplus to requirements.
Needless to say, we also monitored cash flow and profitability and quite a few other things, but only by exception – for example, we only worried about the detailed and individual overheads if they exceeded budget or the gross profit is this dipped below target. The important thing was that we were able to focus on the most critically important things which made the business tick.
If you’d like some other examples of Key Performance Indicators in other lines of business just let me know, but otherwise if you want help to monitor the Key Performance Indicators in your business contact 0800 ASK NICK or get in touch by email.