You must have taken part in a sporting activity when you were a kid. Having done so, how did you know if you did well or not? Someone must have kept score, even if it was only your mother standing on the sidelines. The final score was important, but there were also other measures that told you how well you performed, such as the number of minutes you spent on the ice in hockey, or your triathlon split times. These unique measures are called Key Performance Indicators, or KPIs.
Whether you run a business or work for a business, KPIs are critical assessment tools. KPIs evaluate if you are achieving what you have set out to achieve. As a business owner, a primary measure of success is if you made as much money as you set out to make, but this is by far not the only important measure.
In any high-performance situation (e.g. sport or business), you’ll hear the saying: “focus on the process, not the outcome”. The key is to determine which KPIs not only report your results, but the ones that drive your business performance. It’s easy to measure net profit and gross profit, but it’s not as easy to know what drives this and how to track that driving measurement.
“If you aim at nothing, you will hit it every time”
Zig Ziglar
Common KPIs for businesses are your gross profit amount and percentage, payroll costs as a percentage of sales, total full-time equivalent employees, EBITDA (earnings before interest taxation depreciation and amortization), the number of monthly unique visitors to a website, and many more. Because each business is unique, you need to invest time into determining which KPIs drive your results.
Here’s an example of how KPIs can drive your business success:
Let’s say you run a grocery store. The industry average net profit for grocery stores in Canada is 2.8%, with the top quartile making 19.2%, a premium of 16.4%. You notice that not only are you below the average, but you are in the bottom quartile. You would like to transform your business, but you don’t know where to start.
First, let’s break down the business into smaller components. Say your store has produce, bakery, other perishable goods, and non-perishable goods sections. Let’s focus in on the produce section. Some KPIs for that section might be:
- Average shelf life of produce
- Percentage of waste
- Proportion of organic versus non-organic certified goods
- Highest margin product
- Lowest margin product
- Average margin for all produce
Now you can start evaluating. Is there something you can do to reduce wastage? (e.g. selling products at a discount before it spoils, rather than giving it away.) Maybe you can take bananas approaching their “sell by” date, and advertise them as “bake-ready bananas for banana bread”. Another way to use a KPI to make a positive impact on profit is to expand your local organic produce section, knowing that people are willing to pay a premium for products that are organic and locally grown. Or, you could determine that the low margin products are not worth keeping in stock, and eliminate these from the store entirely.
Tracking these measurements with KPIs makes it easier to drive up your profitability without focusing on the profit, but rather on the items that drive your profit.
Please leave your suggestions for KPIs in the comment section below.
Question: Are you having difficulty identifying your KPIs? Don’t know where to find the data for your KPI? You can leave a comment below.
Tags: Budget, Business, Financial Literacy, Financial Planning, Planning, Success