Know Your Numbers: Building Effective KPIs for Your Business

by | 07/02/2024
Know Your Numbers: Building Effective KPIs for Your Business

Marshall Atkinson emphasizes the importance of building and understanding effective KPIS for your business. He also details what KPIs are important to measure and how to implement these KPIs.

Somewhere along the way during your career, you probably have read, watched, or listened to someone detailing the importance of KPIs or “Key Performance Indicators.”  About ten minutes into whatever they were talking about, you started checking your phone, emails, social media, or anything else but tuning into what the person was trying to communicate.

KPIs?  Numbers?  Math? 

Boring!  I mean…c’mon.  Our business is doing great.  We’ve had success without any of this KPI nonsense.  Why start now?

Because the sucking sound you hear is the profits flying out the window.  Even if you have had success without worrying about your KPI metrics, that doesn’t guarantee future success.  And let’s not forget you could be leaving a duffel bag of uncaptured cash in your business because you aren’t doing the work necessary to pick it up.

Here is what I mean.  A “Key Performance Indicator” is anything important in your business.  You want to keep track of this because if something is important, you want to ensure you always get the maximum level of effectiveness.  However, if that hasn’t been defined yet, how do you know you are operating at total capacity and don’t have any unrealized potential?

This article is about defining these opportunities, implementing a system, and ensuring it works.

Understanding the Best Metrics

What are the most important things you constantly keep an eyeball trained on in your business?  Sales?  Production?  Customer satisfaction?  Order accuracy?  How many minutes does that guy in production spend in the bathroom every day?

There are hundreds, if not thousands, of things we could measure in any business.  But only a few click into place to make a next-level difference.  When you consider something that important, what pushes it into either success or failure?

For example, let’s take probably the most common one, sales.  Sure, you can set a top-line revenue goal.  But what drives that?  Can you break that down into easy-to-understand math to know daily if you will achieve that sales goal?

Let’s say you want to hit a sales goal of $1,000,000.  If your average order size is $1,500, you could use that to determine an easy-to-read KPI.

$1,000,000/$1,500 = 666.6 orders per year.  Let’s round up and call it 667.

667/12 months = 55.58 orders per month.  Let’s round up and call it 56.

56/4 weeks = 14 orders per week.

14/5 = 2.8 orders per day.  Let’s round up and call it 3.

Therefore, if your business closes 3 orders daily with an average sales value of $1,500, you will easily hit your $1,000,000 revenue goal.

Look back at your sales effort yesterday.  Did you close at least three orders valued at $1,500?  If not, what changes are you making to hit that small daily goal?

Other Examples

Of course, that is one example.  The KPI that matters to you most could be about production time, employee education, defect rates, or any important data points to signal success or failure easily.

More than anything, you want your KPIs to be relevant.  There is little sense in tracking and measuring data if you do nothing with the information.  Once you have the information, start using it as a signal for change.  As my good friend Mark Coudray says, “Only three things can happen, and two of them are bad.  Things are going to get better.  Things are going to get worse.  Or, things are going to stay the same.”

When you start digging into the KPI numbers, it can point you to the opportunity to improve other business areas.

Opportunities In Front of You

Let’s say you start measuring your production downtime.  This is the chunk of time during the workday not spent printing.  When you are printing, you are making money.  When you are not printing, you are spending money.  Downtime can get expensive, so it is a fantastic KPI to be tracking.

Because of the new interest in the downtime KPI, your team has started looking into the root cause of the downtime for production.  It is mostly waiting on things.  Waiting on ink to be mixed.  Waiting on screens to be prepared.  Waiting on inventory to be counted and staged.  Waiting on manager approval to run a job.

The math behind their hypothesis proves them right, showing that over 60% of the shop's downtime is waiting for something.  To correct this, the team starts having the ‘scavenger hunt” for everything needed for tomorrow’s production, today.  This takes some reorganization, training, and process changes, but they do it.

Because of this effort, production increases, costs drop, and there is an increase in both employee and customer satisfaction.

Because two things happened: something got measured, and that led to change.  The improvements were validated because the KPIs proved the idea worked.

What KPIs to Measure?

Still think KPIs are boring and a waste of time?  If you do, I’m sure your competition will be happy.

But, if you want to dig deeper into this, let’s explore how to determine what KPIs you might want to measure.

First, let’s examine this from two perspectives.  What’s broken or needs to be improved?  And, what’s important and needs to keep working successfully?  You can build KPI metrics around either of those ideas, but probably both would be important.

The best way to do this is to gather your team and discuss.  I’ve learned over the years that if you want to know the actual reality of a business, you have to get out of your office and ask the people doing the work.  Believe me, they have an opinion.

As your goal is to make their work easier, improve your product, lower costs, and increase profits…this is a valuable activity.  Use a whiteboard or a big easel with a pad.  Brainstorm the important metrics to measure and analyze and what feeds into them with your team.

At the end of the exercise, you want to list important points about the business that keep the company healthy.  “If these things don’t work properly, we’re doomed.”

And for each one, determine how success can be measured.  What and how will you measure something, and what is a successful number?

Define Important Things in the OKR Format

One easy way to help define success is to list each crucial point in the OKR Format.  OKR stands for “Objective, Key Result.”  Meaning, “Here’s what we want, and here’s the positive result of that happening.”

Using our sales example from earlier, if the Objective is to have a daily average of three sales per day, with a sales total of at least $1,500, then the revenue goal of $1,000,000 will be reached.

The next step is to see if you can understand what feeds into that success.  How many daily quotes do you have to send to close three sales?  If the average order value is $1,500, what type of customer spends that amount?  Do you close more sales by referrals or by cold calling?

This is where the real work begins.  State your goals, define what is important, set a target KPI number, and measure and test the results. 

Don’t forget you need to involve your team in all aspects of this journey.  After all, they are the ones that will be breaking their backs trying to make it happen.

Implementing KPIs

Let’s say that you and your team have met and have chiseled out your first set of KPIs to use.  The next step is actually implementing the data collection step to gauge success.

You want to make this as easy as possible.  If you can automate the data collection without a person doing the work, that is best.  However, that isn’t always possible.  If a team member is going to be spending time and effort tracking something, make it easy for them to collect the data.  Simplify things as much as you can, and give them the tools to be successful.

You should follow up frequently with training and support to ensure the data is collected accurately and timely.  My experience has been that if a timesheet has numbers that overwhelmingly end in a 5 or a 0, the team member is making them up.

Creating good habits is how this data gets collected.  It needs to feel like a natural part of the process and happen every time without fail.

Conclusion

All the veteran leaders of business will tell you that “you can’t manage what you don’t measure.”  This is 100% accurate.

Taking the time to collect, sort, graph, and analyze the key data points for your business is a critical step in keeping your business healthy and growing. 

Performance data helps a leader make informed decisions.  Otherwise, you are just guessing.

 

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