mergers + acquisitions accounting
Management guru Peter Drucker said it best, “what gets measured, gets managed”.
His core message is that without an understanding of performance measures we can’t take action to correct and improve the activities that deliver performance.
From a business strategist perspective, key performance indicators or KPIs are an essential part of any business plan. KPIs are measures of the key drivers in your business and can be financial and non-financial.
what are KPIs?
The KPIs link to those business levers that can be pulled to deliver an impact on business performance. Your business plan should include your 4 or 5 critical KPIs and the performance level required to achieve the desired results. By analysing your important KPIs you can quickly determine if you are on track towards achieving your goals or need to take corrective action.
Now to make it a little more challenging, it’s important to ensure that you are measuring the right things and not what is simply easiest to measure.
For example, is total sales an appropriate KPI? In many instances, I would say no, it is an important budget measure however too high level to be used as a KPI. The reason I argue no is that even though we might measure sales and can see that it has decreased, we have no understanding of why sales have decreased. Sales are what we call a lagging measure, that is it provides information about what has happened after the event and generally known as an output measure.
what KPIs should we use?
Ideally, we want some of our KPIs to be leading measures that will provide a more real-time view of performance and allow early corrective action to be taken if required. These KPIs can be harder to measure but easier to influence.
To be ineffective control we need to ask what are the drivers of sales? What number of sales calls were made, how many leads were generated, how many proposals were issued, what percentage were converted, what was the average sale value, what did we spend on advertising to generate those leads for the month and so on.
If our sales decrease, a closer examination might show that we didn’t issue as many proposals for the month and therefore converted fewer opportunities. With that understanding, we can start to dig deeper to better understand the root cause. Why did we issue fewer proposals? One of the support team was away on extended sick leave and as we had no back up for the support team, we have a backlog of proposals waiting to be prepared.
OK, now we are getting somewhere. The admin team needs better support and we need a backup in the business to assist with issuing proposals as the need arises. We can then take corrective action, who is the best person to fill this role, do they have the capacity, what training will they require and so on.
so what does this look like in practice?
If our business was keeping a running tally of proposals issued and reviewing that each week it would likely have realised after a couple of weeks that the number of proposals issued was below the expected number and would start to investigate immediately. Having found that the support team was short-handed earlier, a workaround could have been found to keep proposals, and the conversions, flowing.
Conversely, using sales as the measure might mean that we don’t close our end of the month until say the third of the next month. Then by the time the reports are generated it is probably a week or more gone by at best before you can see the decrease in sales. Then someone would start to investigate and eventually determine the cause of the problem – some three or four weeks after our other business has the solution.
In this case, we have identified that a key KPI for this business is measuring the number of proposals issued. Monitoring this data provides a real-time link to sales generation and can be described as a non-financial leading indicator.
Using a leading measure, like proposals issued, has helped to predict the performance of the lagging measure, sales. This illustrates that using the correct measure can make a material difference in your ability to control the key drivers of your business.
when developing the key KPIs in your business consider if the measures selected will:
- Assist better and more timely decision making
- Motivate your team by tracking relevant performance
- Help you better follow your business plan towards your agreed goals
With this in mind and a focus on KPIs that monitor your key business drivers, you will be well on the way to achieving your desired level of performance.
If you would like to learn more about performance measurement, get some assistance with your business plan or KPI development, please feel free to reach out. I’d love to help you build a business that serves you better.
