In my last column I suggested business owners use Key Performance Indicators as a tool to manage their business and as a tool to force themselves to be managers of their business. I had planned on giving some examples in this column, but realized I first needed to define them better.
A KPI is a metric used to monitor progress towards meeting an important business goal. A metric is a number that measures the results of an activity. A number metric is just that, a number. For example, the dollar amount of a current month's sales is a number metric. A ratio metric is a number that describes the relationship between two other numbers. For example, the rate of increase in this month's sales over last month's sales expressed as a percent is a ratio metric. Either can serve as a KPI. The data for a metric must be available and repeatable. For example, a measure of customer satisfaction would be a useful metric, but is not readily available unless a way is found to sample customer satisfaction over time and express it as a number or ratio.
There are all sorts of metrics that one can find in a business. Many are interesting, but unless they measure progress towards an important goal, and can be used as a guide to change a business process in a manner that results in meeting that goal, they are not useful as a KPI. I had an acquaintance who owned a coffee shop. He tracked a number of metrics. One of them was daily weather expressed as a number ranging from one for excellent to five for really bad, because when it rained or snowed business would fall off. He could directly relate that to the number of customers that he served in a day. It seemed to me to be useless as a KPI because he could not control the weather. However, I learned that he could control the quantity of donuts his bakers made every morning based on the weather forecast for that day, and thus reduce the quantity of unsold donuts thrown out on a bad weather day. Used as a KPI it had direct impact on his daily profit. A KPI must measure something important and which is actionable. That is, something an owner can take action on to change things in order to meet a goal.
Even the smallest of businesses can benefit from the use of KPIs. I will provide some examples in the next column.