When we get in our cars and set our destination in Google maps, it will populate the most effective and efficient route (hopefully).
But, when we are running our business, is every turn along the way getting us closer or farther away from our goal?
It is tough to visualize our progress if we don’t have measurable indicators.
And, this is where Key Performance Indicators can come in (KPI). However, KPIs, like our google map, is only as helpful as it is current and relevant. It does us little good for the map in our car to be two turns behind. In the same way, it does us little good to have outdated KPI information.
Why are KPIs so valuable? Because, back to the analogy of the google map, when what you want to know is what street to turn on next, too much information will only get in your way. If google maps populated tons of information such as the historical context of the geographical area, or the types of trees that are growing on that street, while it may be interesting, it will only slow you down and you may miss the next street to turn on, and all you really needed to know was the name of the street and whether to turn left or right.
In the same way, when given the whole P&L or the whole balance sheet might have some interesting tidbits, we might miss the most important information due to the amount of information. KPIs help us see very clearly our route and where to turn next.
There are two types of indicators: leading or lagging. Leading indicators would be indicators of what the future may hold, while lagging indicators would be indicators of where we were in the past. When making an important business decision, leading indicators are the most important. It’s not that historical information isn’t important, and surely we should keep our eyes on trends. However, in our environment today, being able to predict future customer and economic trends will be the areas that we should focus on so that we know where to focus our resources.
One way for managers and other business decision makers to be able to see the important information more clearly is to organize the information into various objectives. Each objective would have its own dashboard (page(s) showing all of the KPIs in graph format).
For each objective, there could be a set of KPIs and the correlating graphs to make the information useable (again, a dashboard).
The first objective is often the overall company performance. This might be the first page and would include KPIs (in graph format) such as revenue growth, net income, income per employee, etc. These would be displayed in graph format over time.
The next objective, for example, might be product development. The KPIs for that objective could be sales on new products, completion percentage of various projects, and customer feedback per critical area on those new products.
Different objectives would also have different frequencies. We might want to keep an eye on new products on a weekly basis, whereas the overall company performance might be a monthly and quarterly basis.
These dashboards can be created internally with spreadsheets and graphing functions, or, depending on the company’s resources, there are other options as well. I’m not endorsing either of the following, nor do I get any financial incentive for referring them, but just for a couple of examples:
In summary, KPIs and dashboards are excellent tools for effective decision making, but are limited by the quality of the information and the selection of the appropriate information.
by Cynthia Bassett Hartwig, CPA