Which KPI’s Are Important?

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The KPI’s of your business are important because they tell you what is actually happening inside your business, even if you are a one-person business – provided you measure the right things.

If you have read the earlier posts then you already know that KPI’s can be captured with almost zero effort, and that not all KPI’s are equal: profit is the most important of them all. That said, the others can give you an early warning that your profit may be about to nose dive. Here’s how they can help.

While profit is important, so is the overall income. What activities/products are generating the biggest share of your income and profit? Can you focus on those and reduce the effort you put into the worst profit generators? If you can’t reduce what you offer your market can you change the way that you make the offer? Perhaps by taking orders and then manufacturing the item rather than maintaining a selection on the shelves for instant sale?

Income is only a part of the profit story – the other half of the story is your out goings. That’s everything you spend money on, either as an investment, cost of goods sold, other costs of doing business, or as an expense item.

Here you need to look at Value For Money. If you are buying product or materials then you don’t necessarily need “the cheapest”, you need the one that maximises your profit. It may be that a difference in quality may cost you 5% more and you can sell it for 10% more. Some funds spent on staff morale will most likely reduce your staff turnover – and therefore your hiring and training costs though there is no need to buy everyone a Bentley company car, or provide the best French champagne for staff drinks every Friday after work.

Higher sales prices can reduce the overall number of sales, which just means that higher sales prices don’t necessarily lead to higher overall profits. Likewise the lowest cost purchase may result in a higher failure rate in your products, in which case a lower purchase price may lead to higher expenses as your warranty take effect.

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It follows that you need to consider your income and outgoings in the context of “Whole of Business”.

Other early warning signs can be derived from activity. Most of us have heard that the more calls you make the more presentations you get to make, and the more presentations you make the more sales you make. There is more to it than just numbers – for example one rep might make twice the sales calls but be only 25% as effective as another. Of those two – which would you rather hire?

The point here is that some metrics are easy to measure – you just need to know that the KPI actually means something.

You also need to consider the morale of your team. How many (or what percentage of) staff have resigned in the four weeks/quarter/six months? Why have they resigned? Consider the cost to the business of staff turnover: the cost of advertising the position, interviewing and selecting the best candidate, training them (at least in how you do things) and monitoring their progress until you trust them to work without higher supervision levels. Now add the lost opportunity cost where an experienced staff member was training or supervising a new hire instead of making their usual quota of sales. Or maybe just fixing up the mistakes of the wrong hire. Low morale and high turnover of staff can cost your business big time.

It probably pays to be nice to your staff and customers!

It also pays to keep track of what your competitors are doing. Have they invented a better way? Is their market share increasing or decreasing? Are they opening new outlets or closing some existing outlets? Have they made a dramatic change to the way they do business?

Can you see how these measures provide indications of the health of your business? IF not then use the contact us form to leave any questions you may have.

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