I do still find that there are some businesses out there that still have no dashboard or any form of indicators that track overall business performance. And when I say none, I am also referring to those that seemingly only use the bank balance as their barometer. These missing measures that I am referring to are often called KPIs or Key Performance Indicators.
This week I met with the owners of a smaller business: they have 4 staff and have been working their butts off this last year as well as struggling to keep up with customer demand and their finances have been tight. Within their industry, they, like most of their competitors, use off the shelf software that tracks a whole bunch of metrics, that are useful and related to their industry. So, what’s the problem?
Well, having a little more time on their hands because of the COVID-19 lockdown, they managed to get their accountant to do their provisional 2019/20 accounts. They were shocked to learn that they had a $30K loss. “Ah, that explains why the year was so tough.”
This is not a fictional case: this is exactly what happened and continues to plague thousands of other businesses. Yet the solution is relatively easy. There are just 3 broad measures that you need to implement to ensure that you do not end up with this problem, and these three measures will 100% drive company performance in the right direction.
 Lagging Measures
These KPIs or measures are called lagging ones because they measure past events and are certainly the most commonly used ones. They are useful because they are usually exact and easy to understand. With the business I mentioned above, the $30K loss was a lagging indicator, and this also highlights the problem with them. They need to be used as soon as possible after the event. In this situation, the horse had already bolted. Despite the active use of the “industry norm” software provided, there were no effective measures in place to understand their on-going real profitability.
So, by all means, use lagging indicators in your business- just use them as soon after the event as possible, rather than weeks to months after the event has occurred. Examples include revenue generated, profit level, average sale value, product mix sold, customer retention percentage: there are hundreds of options and you need to find what works for you and your industry.
 Leading Indicators
These type of KPIs are used less, mostly because they are generally harder to measure and sometimes harder to identify. They are valuable because if you identify and use them correctly, they indicate the likelihood of future events i.e. before the horse has bolted.
Examples could include: the amount of new enquires or tenders, that could indicate the likelihood of future sales; surveys that relate to customer satisfaction, these could indicate customer retention, loyalty or complaint levels etc; debtor days (how long are customers taking to pay) could indicate future cash flow changes. Again, there are hundreds of options available: you need to choose those that are most beneficial to your business and your industry.
In the real world, you will find that sometimes an indicator could be considered either a leading or a lagging one: it all depends on what perspective you take. For example, an employee satisfaction survey (or regular employee reviews) could be viewed as a lagging indicator because it could measure that employees are already unhappy and disengaged. This would especially apply if these are done annually. If, however, they are done quarterly, you could then consider them to be leading, as you will have enough time to act on them before problems start to multiply.
The message is: don’t get too bogged down in the details, just ensure that you have a mixture of both and that they are all important to both your business and your industry.
Now for the elephant in the room, and possibly the most important group.
 Differentiating Indicators
Most businesses will agree that if they were different from their competitors, their business would be able to be more profitable, they would enjoy their business more, the staff would be more productive etc. And differentiation is at the heart of any meaningful business strategy: in fact, it is arguably the most important pillar of a strategy. Thankfully, many businesses do get this right as well, and they work very hard at creating this differentiation. The result is not always a mind-blowing different business, often it comes down to becoming experts in the basics.
For many of these businesses, the missing piece in the puzzle often comes down to the fact that although they have identified how and where to differentiate, they simply don’t track or measure this. Like the well-quoted phrase “what gets measured grows”, so too should you be tracking your differentiation. What does this really entail, and why is this often so difficult?
In the case of the business I mentioned earlier, they got it wrong because they were not reporting on their actual financials on an ongoing basis, and here there is a difference between financial reporting (this is usually used), and managerial reporting (seldom used). Secondly, they used one of the recognised industry-specific software programmes that measured important aspects of their business just like their competitors were. I am hoping you can link the dots here.
If “what gets measured grows” applies, and the majority of your competitors are measuring the same things, then how does that support your differentiation? And if you are not differentiating yourself, then how are you going to perform better than average?
After working through and completing your SOAP or business strategy it is absolutely critical to ensure that you are actually measuring your differentiating activities. If you don’t, it is highly probable that you will lose this differentiating advantage as they become increasingly less impactful in your business and you continue to trade as an “average” business.
Summing it all up
Ensure that you have set up in your business meaningful KPIs that measure both lagging and leading aspects within your business. Some of these are just no-brainers like what is your revenue measured daily, weekly or monthly; or what is your pre-tax profitability. Beyond this, identify what are some essentially KPIs that you have in your industry-specific business. For example, an accountant or lawyer may measure revenue generated per employee per minute or hour, but this measure makes little sense for a charity. Lastly, ensure that you have some measures in place that directly track your all-important differentiating activities, and these could be either leading or lagging.
I have two last points regarding KPIs in your business.
- Ensure that you are measuring all of the important aspects of your business. So if you examine the A.D.D. model, it will become obvious that you should be measuring aspects within the Attract side of your business, often related to overall sales and marketing. As well as the Design side of your business, related to all the financial numbers in your business. And lastly, to the Delivery side of your business which is all to do with the human factor in your business.
- Here the common phrase “the more the merrier” does not apply. If you have too many measures in place it simply distracts your focus. An effective way to manage this, depending on your business size, is to identify a handful of KPIs that best apply to a specific team or individual and that these cascades back to a handful of measures that will ensure overall company success.
I vividly recall back in the days, in my first company, we decided to bring the staff up to speed with the business’s financial performance. We gathered everyone together and the accountant wrote all the financial performance figures up on a whiteboard. We tried to make this engaging for the staff by asking them to guess the next figure. The entire exercise was a flop. Every one of the measures was important to the business, and our accountant was very aware of this, but being a detail orientated person, there was simply too much micro-level detail. Net result, virtually no information was retained by the staff and therefore there was virtually no benefit to this exercise or positive impact on the business.
I am passionate about this subject, as I have lived through this myself in my own business and see the same mistakes being made by so many businesses today. If you are interested to know any more, and simply out of respect for your time for reading this far, I will happily gift you a complimentary coaching session (of up to 90-minutes, so this is not a sales call) to help you with your KPIs. You can book this, by clicking here.