I believe key performance indicators (KPI) are the most important things a business owner can do to improve the economic performance of their company. The problem is that when I mention the term key performance indicator to a business owner or advisor I often get a blank stare.
This is because the owner doesn’t even understand the basic financial measurements the company has. In addition the owner doesn’t understand what the economic drivers are for success in their business. When an owner understands how KPI’s can help drive success in their business they are taking steps towards moving towards improving the value of their business.
Key performance indicators are different for every business. They are often measurements that are taken from areas of the business that aren’t in the profit and loss statement, balance sheet, or cash flow statement. These reports are very important but they’re often just a starting point to take advantage of using KPI’s and drivers to improve your business.
Although basic financial reporting is rarely the home of KPI’s, it’s always the starting place for deciding what the KPI’s are in your company. I suggest that you start with a decision about what numbers on your financial reports you want to improve.
For example, you might want to improve your cash position. You would find the components of creating cash on your cash flow statement. From there you could decide which areas you want to improve. For example, you might decide that improving inventory turns would be a good thing to work on.
The next step is to decide and measure what the drivers are for reducing inventory and increasing inventory turns. These measurements are the drivers or the key performance indicators in this area. If we improve inventory turns inventory is reduced and cash is created.
The point with improving your KPI’s is to help you achieve your business economic goals. A first step is to learn how to read and understand all of your financial statements. From there you can take steps to measure what drives the key numbers on your statement.
I believe that what gets measured gets done. Measuring key measurements almost always provides an improvement in those key areas, just because you’re looking.
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