Industry Insights

Successful business owners are often high-energy, motivated and laser-focused on their business. These traits—combined with a willingness to take on a significant amount of risk—have allowed many small businesses to weather the economic downturn and position themselves for a rebound by focusing on managing expenses and closely monitoring activities.

Effectively managing the operations of a business requires strategic planning, which encompasses numerous areas. Analysis of operating results and key metrics is an important component of this process. Key Performance Indicators (KPIs) and benchmarking are two complementary tools used by many successful owners and managers.

Key Performance Indicators

Industry theorists believe approximately one-third of companies regularly fail to make correct decisions about business changes due to lack of proper market information, processes and tools.

KPIs, commonly grouped together to build a “dashboard,” are quantifiable measurements used to monitor critical success factors of an organization. KPIs are designed to allow users to instantly gauge performance in the context of an expected result and a targeted result. KPIs also must align with the mission of organization stakeholders and management. Such indicators should be useful in gauging whether operating results are meeting expectations and potentially identifying problematic areas. KPIs must be specific and unique to each user so that the user can quickly review them, understand the effects of the reported results and use the information in the decision-making process. Examples of KPIs include:

• Sales, gross profit, shipments or receipts, organized by location, division, territory, product, customer, etc.
• Termination characteristics, such as employee turnover rates, for a company focused on reducing employee turnover

While each organization will develop its own KPIs, keep in mind they must be in alignment with organizational goals. Building a dashboard of KPIs should be focused on significant metrics that can easily be reviewed, managed and updated frequently. Too many KPIs will dilute the tool’s effectiveness.

Benchmarking

In connection with KPIs, benchmarking can allow an organization to further evaluate its results. Benchmarking involves the analysis of your organization's KPIs against other similar entities. There are many methods used to obtain benchmarking data, and many trade organizations publish such data. By taking your organization’s KPIs to the next level through comparison of your results to your peers and competitors, you can better evaluate your results. This should encourage management to seek out best practices with the goal of becoming a market leader and the standard for benchmarking.

Businesses that continuously strive to improve do so by setting goals and targets. KPI metrics are put into place to drive and measure progress. While achieving goals may indicate improvement and greater profitability, gauging such progress against peers also is beneficial. Comparing internal results with others, whether direct competitors or not, can intensify an organization’s commitment to improvement and encourage a more critical review of existing processes.

For additional information on how KPIs and benchmarking can benefit your business, please contact your BKD advisor.