Key Takeaways:
- Key Performance Indicators (KPIs) are essential tools that help business owners gauge the successes and failures of their operations, offering real-time insights into various departments.
- Flash reports provide an immediate overview of how a business is performing, allowing for quick adjustments.
- Implementing a system of accountability, like closed-loop management, ensures that both business owners and their teams are aligned with set goals.
Think About This:
Your business isn’t growing as you hoped. Things hit a snag, and you’re left wondering what’s exactly the problem.
Or, you are growing so fast that not all controls are as solid as they should be. Not understanding your problem areas is as bad–if not worse–as having them.
It doesn’t matter if you’re starting a business or you’re a seasoned owner of a successful organization, there’s a lot you can learn when it comes to effective management.
This blog aims to familiarize you with key performance indicators, otherwise known as KPIs, and to help you develop a flash report to understand what’s going right and wrong in your business.
Before moving forward, grab a pen and answer the following questions:
- Do you have a system to objectively measure performance for each department in real-time?
- Do you have defined and written operational and financial goals you want to hit monthly?
- Do you have a timeline for what you want to accomplish?
- Are your employees held accountable to their performance?
If you answered ‘yes’ to any of those questions, then congrats on knowing what key performance indicators are. However, there is so much more you probably haven’t learned.
If you answered ‘no’ to any of those questions, this blog is geared specifically toward you!
Let’s start off with the basics!
What Are Key Performance Indicators?
KPIs are your guide to understanding every moving part of your business and might just be the most important part of management.
Too often, we see owners fail to gain a clear understanding of how their business operates.
They fail to log any departmental metrics of their operations throughout the year, and they’re stuck with an idling business wondering why they’re not going anywhere.
Key performance indicators are a pertinent part of measuring the successes and
failures of your business. Also known as flash reports or dashboards, KPIs allow business owners and managers to gain an overview of how their business–and individual departments–performs at any given time.
A KPI measures the business’s performance and actual results against specific targets in a given period.
For smaller businesses, KPIs measure the entire business as a whole. For larger businesses, KPIs are departmentalized so that department managers are held accountable for department results.
Regardless, KPIs should be tied together into a single flash report, or dashboard, for the business and ownership to see as a whole.
Key indicators can differ for multiple businesses; a distributor’s KPIs will differ from a manufacturer’s, and so on and so forth.
Even similar businesses have varied KPIs; not every business shares the same goals and metrics.
When we work with clients, we first determine the pulse or critical measurements for that business. Next, we figure out the timeline to achieve said goals. Every business is unique, which feeds into the flash report.
Regardless of your industry, there are some basic KPIs you can start measuring today.
Financial
- Liquidity
- Line of Credit
- Accounts Receivable
- Accounts Payable
- Payroll & Overtime
These indicators are present and tracked in most businesses for various reasons. Operational KPIs are specific to the client’s industry but generally include things like:
Operational
- Equipment Utilization
- Bid Tracking
- Job Completion Status
- Scheduling
- Labor Productivity
In a flash report, these are placed under a magnifying glass and inspected with a fine-toothed comb. A flash report is generally done weekly to show you the key areas in which you are underperforming and allows for corrective actions.
Flash reports can also be used to drive management meetings. Ultimately, the goal is to identify and repeat good productivity and take corrective action for the bad.
What is a KPI Used For?
While most businesses will use flash reporting to measure daily operations, flash reports can monitor projects, risks, and employee measures.
Essentially a KPI shows you a highlight of all the relevant moving parts of your business at once.
Financials and Post-Mortems
As we’ve said before, flash reports show how the business operates in real time. But there are other reports called post-mortems which give owners a complete financial statement review 10-to-20 days after the end of the month.
You don’t have to wait until financials are released to know if you’ve done well. Having real-time KPI measurements of sales activity, bid activity, labor costs, productivity and more weekly gives you enough time to course correct during the month versus after.
Rather than fixing a problem 20 days after the end of the month, you can make adjustments throughout the month based on KPI management tools.
Employee Measures
Measuring employee work hours against performance can give a general idea of the amount of overtime necessary to complete projects or if overtime is paid out for less productive work.
KPIs can’t quantify morale since that data can’t be measured and recorded as hard data.
Closed-Loop Management
At American Management Services, we manage our operations using a process called closed-loop management. A closed-loop management system is a series of stages set to reach the desired outcome. Each stage throughout the closed-loop system feeds into and affects one another.
KPIs are one part of a closed-loop management system but an important section.
Business Plan
It doesn’t matter how long you’ve been in operation. You should always draft and implement a business plan.
Determine your goal for the end of the year and devise a timeline to achieve said goal. Creating a business plan takes patience and time. Think about what you want to accomplish in the coming year.
Consider profit if you want to expand your operations, increase your market share, and more. The goals you set here will be what you measure your flash metrics against.
Pre-Determined Profit
When calculating profit, most businesses will wait until every item of expense is paid out–leaving whatever is left over as profit; this is residual profit. To us, this is wrong!
You should develop your business plan around your desired profit and then establish your operational targets to reach your goal while measuring it using flash reporting.
Why put profit on hold? Rather than waiting to determine your profit after paying everything out, you make profit your first line item of expense. Simply put, you set aside a certain percentage of every dollar you generate. It’s a simple concept, but it requires discipline and training to implement and sustain.
KPI or Flash Reporting
After creating a goal–or series of goals–based on your pre-determined profit plan, the next step in closed-loop management is to implement flash reports.
How do you know what you’re getting in return if you’re not measuring?
Performance Evaluation
With goals and measurements in place, you need to include some way to hold both yourself and your key people accountable to achieve said goals.
For example, let’s say that you need to reduce the number of overtime hours to achieve your profit goal. You would have your production manager responsible for lowering the number of overtime hours by X and measuring that metric weekly.
From a KPI perspective, this would be included as an objective, and the manager would be periodically evaluated against that objective. In weekly management meetings, the production manager would report on their progress and any plans to minimize overtime.
The production manager is ultimately held accountable for reducing the amount of overtime over that set period and the week-to-week responsibility of reporting and commenting on the overtime measurement.
Pay-For-Performance
We believe in pay-for-performance, meaning rewarding your employees for
executing according to plan. If profit levels exceed the desired pre-determined profit plan, then a
percentage can be pooled together to fund the pay-for-performance plan.
Key personnel would own a share of the pay-for-performance plan. In periodic evaluations, ownership would calculate the funding of the pool and grade employees based on their flash metrics. There is not one section of closed-loop management that works without
the other.
Every section of closed-loop management works in tandem with one another to achieve a specific goal. If one section isn’t running properly, the whole system fails to run smoothly, and problems arise. Anyone not meeting their goal is reprimanded.
Start Building Out Your KPI
Let’s get you started on some very simple KPIs that you can use today.
Download the worksheet below to follow along.
We’ve provided a few simple worksheets to help you determine your problem areas. Though this worksheet solely focuses on the financial aspect of your business, it’s crucial you begin to look at these five segments under a magnifying glass.
So many problems can go wrong in one of these five areas that it’s best to start out here and work your way to other parts of the business.
Measuring Your Business At A Glance
A KPI is as strong as it is versatile. From measuring your finances and evaluating employee
productivity to the status of a job in progress, a KPI is a guide to helping you achieve
business success.
Depending on what you want to accomplish in your business, your key performance
indicators can shift based on goals, projects, and timelines.
You should already have in place a system of measuring the metrics necessary for maximizing success.
What to Do Next
If you need help developing a system of accountability that’s governed by KPIs in your organization, feel free to fill out the contact form below or call (800) 743-0402.
