KPI’s (key performance indicators) help business owners keep track of what’s important in their business. Drivers are the activities that have a positive or negative effect on KPI’s.
I’m amazed at how few businesses track what’s important, or for that matter even know what’s important in their business. I’ll often hear that profits are important, managing receivables is important or controlling payroll costs is important. Yes, all of these are important, but are they the really important things that tell you about success in your company.
I believe the most important KPI in most companies is cash velocity. The activities that are listed above are all drivers of cash. If managed properly those activities will help cash grow. If not, then cash might become less. I believe that profits, managing receivables and managing payroll would all be considered drivers of cash.
The point in managing KPI’s is to identify what will drive the value of your company in a positive direction. Identifying the important KPI’s in your company (and there should be no more than three of them) will help you make more money today and improve the value of your company when it’s time to leave.
KPI’s are around things that move the needle. Top things you should be thinking about will move the needle both in today’s success as well as tomorrows. Understanding what makes your cash grow and being able to communicate this understanding helps you build value today and when it’s time to leave your business.
The problem with many standard cash drivers is they are short term. When building a business, we should look for long-term value. Managing receivables, payroll and profits are important, but short-term, tactical activities.
Long-term activities create enterprise value. Product development, quality, strategic customer management, recurring revenue models and niche management produce long-term value. These are the items we might want to look at as we build our businesses.
Yes, we need to manage for the short term. Those are tactical management issues. The strategic issues are the ones that will drive the value of your business. Identifying KPI’s and drivers around long-term value drivers is what will provide you with increasing business value as well as positioning your business when it’s time to sell.
What are you doing about making your business strategically excellent? Are you paying attention to truly strategic key performance indicators or are you concentrating on the tactical ones. Those who think about strategic KPI’s will produce businesses that have lasting value.
I’ve written a special report on using key metrics in your business. I encourage you to download this report by clicking on the button below. I believe you’ll find this report fits in nicely with the entry above.