By Peter Holtz, CPA

Small business owners should develop key performance indicators as a way to track, measure, and improve their business. It is one of the most effective ways to know exactly where you stand.

These indicators can help the small business owner focus on what’s important to their business and can serve as a measuring tool to track the progress towards of business goals.

Through a gap analysis, the business owner can get a clearer picture between where he is and where he wants his business to be. There are other measuring tools like balance scorecards and results based management, but key performance indicators are simple to develop and track, so they are easy to use in measuring business performance.

Key performance indicators measure what you have decided are your business success factors. Each business needs to develop its own KPI’s, because there are no two businesses exactly alike.

There is so much information available these days, through Google analytics and other statistical resources, that it is easy to get lost in the numbers.

Key performance indicators can be grouped as follows:

— Output KPIs measure the financial and nonfinancial results of business operations. A few examples would be “Sales,” ‘Gross margin,’ ‘Net Profit,’ and “Number of new clients acquired.”

— Input KPIs measure assets and resources invested in or used to generate business outcomes. Examples include ‘Investment made in new training materials,’ “Funds invested on new equipment,” or “Funds allotted towards the expansion of the business facility.’

— Process KPIs measure the efficiency of business processes. Examples include ‘Number of hours to return incoming phone calls,’ ‘Hours or days to perform a service or deliver a product’ and ‘Weeks to fully train a new employee.’

There are potentially dozens of KPIs that can be identified in any business but the goal is to select those measures that deliver the most value.

Here are some criteria to keep in mind as you go about deciding what are the right KPI’s for your business:

— Accountable: KPIs will only contribute to better performance if they are linked to an individual or team unit that is clearly responsible for the KPI.

— Quantifiable: Ideally measures should be quantifiable so that they can be summarized and

viewed objectively.

— Relevance: Measures should be identified that clearly support the bigger goals and objectives of the business.

— Timely: For KPIs to be effective in informing decision making, they need to be prepared

and reported at such a frequency that supports the particular measure concerned

e.g. audience research on a weekly basis.

— Verifiable: The data used to calculate KPIs should be verifiable both in terms of its accuracy

and appropriateness for purpose.

— Cost effective to collect: There is always a cost associated with tracking and measuring a KPI. The cost and effort required to compile and report a KPI needs to be weighed up against the value it can deliver.

KPI’s make it easy to identify trends, spot problems, and focus on important financial and non-financial issues. They are concise, easy to understand, and help you monitor the health of your business. No business should operate without them.

About the Author: Peter Holtz, CPA specializes in providing accounting and tax services to small business owners and professional practices in Stockton, CA. For more information, go here:

financialperformancecenter.com

Source:

isnare.com

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