While creating a driverless vehicle may be a distinct possibility in our near future, a business without people to guide and shape it is not a realistic proposition. A business by its very nature is an organic entity or enterprise and as such requires leadership. But a business doesn’t automatically come with a “dashboard” to show you where you’re headed; how you’re going to get there; whether the path you’ve chosen is the best option; if your “engine” drivers are in optimal condition; and if you have the enough fuel – cash flow – to make the journey. Not to mention that putting your main focus on your cash flow position can be misleading. It can give you a lopsided view of your businesses’ potential as it is not necessarily a good indicator of how your business is going to fare in the foreseeable future. Without a “dashboard” to guide you, it is practically impossible to predict what’s driving your business and how, where or when to change course if need be. So how can you remedy this situation? By consciously building your own business “dashboard” based on Key Performance Indicators or KPIs.
As an owner in charge of guiding your business towards its goals, you need to take into account a variety of key factors, not all of which may necessarily originate from your financial or banking data. Staying firmly focussed on these key factors can go a long way to keeping your business on the right path and ultimately achieving your desired results. But as your business doesn't automatically come with a built-in “dashboard”, it is up to you to construct one that specifically “displays” the indicators key to your businesses’ performance. The alternative is to “drive blind”, and that almost never ends well.
Key Performance Indicators are there to help you determine what exactly is driving your business so you can identify where you can improve and realise increased profits. While the principle underlying KPIs is pretty much the same no matter your business, the actual indicators in play will differ across industry sectors, and from wholesale to retail businesses.
Take for example a service provider which hires out cranes. A business of this nature this will want to maximise the number of hours its cranes are hired out; this is known as utilisation. And the greater the utilisation, the greater the revenue realised. Obviously there may be other factors that can impact the final revenue count such as efficiency (not having redo or repeat work) and the hourly rate, but for now let's focus purely on utilisation.
During a regular working week, one crane can be hired out for a certain number of hours. To calculate utilisation, simply take the actual number of hours the crane is under hire and divide by the number of hours in a standard working week; typically, 38 hours. You can then create a spreadsheet or “dashboard” app as follows:
Crane Hire Example:
|
Week |
Actual Hours |
Utilisation |
|---|---|---|
|
1 |
45 |
118% |
|
2 |
47 |
126% |
|
3 |
50 |
132% |
You can even take it to the next level and display the results in graphical form as people, including employees, do tend to assimilate visuals more easily. And a better understanding of the KPI data will ultimately help your employees – and yourself – determine without a shadow of doubt if the strategies you’ve implemented to improve utilisation are actually working. Measuring such a KPI weekly – or even daily – allows you to make timely adjustments and deal with any variances, effectively driving up the utilisation of your cranes, and so increasing your profits.
Knowing where your business stands in real-time enables you to focus on what needs to be done in order to achieve your monthly goals. After all, it’s nigh on impossible to recover from a bad month in the final week, but you do stand a chance of getting a month back on track if you know the first weeks or two weeks have been particularly slow. This is where having a “dashboard” can make a profound difference to your businesses’ success.
Let’s take another example; a retail business selling a certain product. In this case, the owner of the business has formulated a specific strategy to boost revenue, on average, by an extra 10% to each customer by promoting items that complement what the customer is buying. The business owner wants to determine of her strategy is working, and so she creates a “dashboard” with a KPI designated “$ Per Sale”.
Now, let’s say the business is realising current daily sales of $10,000, with 50 sales being made per day. The spend per customer works out at an average of $200. At the close of each week – or day – the spreadsheet or “dashboard” app for this KPI is updated, making it is easy for the business owner to identify her customer’s shopping trends and determine if her strategy is successful.
We’ve dealt with two basic examples of KPIs that can be measured in two distinct business sectors. But, as mentioned previously, while every business has KPIs like revenue, cost of sales and expenses specific its type or sector, the underlying principle remains the same. Identifying and measuring the KPIs that impact your business is vital to determining what drives your profitability and tracking the effectiveness of the strategies you’ve implemented so you can continue being successful.
We’ve developed a KPI service to enable business owners to understand the key drivers in their business. The better you understand your business, the easier it will be to increase your profits and free up cashflow.
First, we’ll help you establish what your key drivers are. These may be financial (e.g. gross profit margin), or non-financial (e.g. customer satisfaction ratings). We’ll teach you how to measure each KPI and set improvement targets. Once you’re confident measuring each KPI we’ll provide monthly coaching to help you implement a tactical plan focusing on the business processes and behavioural changes required to ensure improvement.
Investing a little time each week and making simple changes can dramatically improve your KPIs, thus positively impacting your business performance and personal life.
Want to learn more about Key Performance Indicators or how to build a “dashboard”? Need help determining what is driving your business? Contact SMART Business Solutions today.
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