"What can be measured can be improved" - Peter F. Drucker
In business, as in real life, we need indicators to measure how far or close we are to goals. These indicators are the first step to make impactful decisions in our present and future. A distance runner decides to improve his time for his next run, while a department store decides to increase its traffic by 50% over the next year, and a restaurant decides to decrease food costs by 10%.
Now, how do we measure the decisions that are made daily in a company? What metrics do we use to measure results? What indicators can we identify to determine if you are close to and meeting your goal? How do we determine what adjustments to make along the way? Think about the goals you have set for yourself for this year. The performance of your company is the result of your decisions.
To answer all these questions, we must understand that the runner will improve his time for his next race by developing a training strategy that will incorporate elements of distance and time. Using specific goals that are aligned to the areas of interest where you can measure your results. An essential part of your business and operational plan is to clearly establish what the objectives are both in the short, medium and long term. Likewise, the development of strategies that are aligned to your goals.
When we collect the data and turn it into a quantifiable measure, we determine which performance measures will be key to success. Key performance indicators (“KPI’s”) are a percentage (%) or numerical metric, which identifies the goals on your way to the success of your company. Monitoring them will help you identify the progress of your sales, marketing, customer service and the health of your business. By selecting the metrics, the appropriate target markets and identifying the indicators, we can directly monitor the strategies formulated for your business.
Key performance indicators ("KPIs") are different for each industry and business. They are based on priorities and performance criteria, whether to increase sales of a particular product, simplify marketing efforts, increase traffic to your website or improve customer service. Although you should not forget that they all have characteristics in common: measuring the critical success factors.
Because they are important?
- They are the echo of organizational goals and strategies. You translate the vision into measurable goals.
- Management decides which key performance indicators (“KPI’s”) will be used based on what the key objectives will be closely measured.
- They provide relevant content and information.
- They provide meaningful information for all levels of the organization.
- They are based on legitimate data. The basis for the metrics and results is your own data.
- They are easy to understand. They are simple results that you compare with the industry and with the determined goals.
- They empower users and result in action. They will help you make decisions on time and make assertive strategy changes.
As your business grows, you will need to stay close to the operational details, to measure productivity and profitability. Your company must determine metrics and use key performance indicators (“KPI’s”); their implementation and measurement will help reduce the number of decisions that are based on instinct, which will lead you to make decisions of objectivity and focusing on the facts. You will quantify the achievement of the goals, established by monitoring and measuring against the standards and objectives established for each metric. By choosing the correct key performance indicators (“KPI’s”) in each area of your business, you will be measuring what is important to your organization.
By: Yesenia Hernández, CPA - Financial and Operational Consultant