Elliot Cooper explains which KPIs deliver the most valuable reports for your industry, and how the ‘Internet of Things’ makes it cheaper and easier to uncover the information you need.
‘Key Performance Indicators’ is a fancy term for ‘measuring the success of an organisation in achieving its objectives’. What those objectives are depends on what business you’re in.
KPIs matter because they are the life blood of effective reporting. So let’s explore the art and science of KPIs.
Finding out what these things actually are is a challenge. The trouble is that there are thousands of KPIs to choose from. Business owners and managers mostly struggle to identify the vital few KPI metrics. It’s common to see extremes of either collecting and reporting on a vast amount of anything that is easy to measure; or having little or no KPIs to understand business performance levels.
The question that will most usefully guide you is this: ‘What does success look like for me in my business?’
This will likely include both financial and non-financial targets. It’s useful to compare yourself to similar businesses in the same industry. Making year-on-year comparisons will also help you draw meaningful conclusions.
Here’s what four big industries often choose as their Key Performance Indicators:
TOP REPORTS BY INDUSTRY
Sales per square metre of floor space.
Web versus shop floor sales.
Average spend per customer through the door.
Number of transactions vs number of people through the door.
Activity based costing – marketing spend vs product sold.
Productivity per staff member.
Sales versus staff costs.
Margin per product.
Sales cost analysis.
Cost of manufacture – per unit, staff costs per factory hour.
Downtime – what was the cause and for how long.
Not all KPIs are created equal. Some will be more important than others to you. When you decide the relative importance or weight of each KPI, you will have what is known as a ‘Balanced scorecard’.
Tracking your chosen KPI’s over time, and weighting them by level of importance, creates the balanced scorecard: a collection of key measures, both financial and non-financial. This is the holy grail of effective reporting because you measure everything that is highly important; you know its relative importance; and you are not drowned by floods of trivial data.
The balanced scorecard should not have too many KPIs. You cannot focus on everything. Identify only those targets that are the most important to you. Focus on measuring and then continuously improving processes to achieve your selected targets.
The ‘Internet of Things’ is a term used in the IT industry to describe the interconnection of devices to collect and exchange data. This has combined with cheap computing power to revolutionise data capture, even for the simplest business.
Take a small retail store as an example. It most likely has a door sensor that tells the shop-keeper when someone enters the shop. The Internet of Things means the door chime can transmit to a low-cost digital counter that records foot traffic directly into your computer system.
By comparing foot traffic with till receipts, you have uncovered an important KPI: number of transactions vs number of people through the door.
This is just one example – there are many more.
Think strategically to decide the most important KPIs for your business, and think creatively about how you can gather the data you need to report on them.
Elliot Cooper is CEO, co-founder and executive director of listed company Enprise Group (NZAX: ENS). He’s a chartered accountant who has worked on many capital raises, as well as multiple trade sales totalling more than $50 million.