It's different for every organization. It may be “make more profit,” “retire debt,” or “open more stores.” For a nonprofit, it may be “serve more constituents.” We may even have multiple desired outcomes.
But how do we measure our progress? For many organizations, it's not a formalized process. Instead, it is often “bad news” that causes managers to recognize their unfortunate circumstances. Often, it is an impending cash crunch that could have been avoided by paying attention to the right metrics all along.
What are these metrics, and how often should we review them? It's different for every business, but the metrics – your key performance indicators (KPIs) – must be relevant, simple, and timely.
1. Relevant. What are the things that matter in your business?
In a sales organization, it's easy to rationalize that only closes matter; therefore, the number of people we talk to is irrelevant. Yet, one leads to the other. If we don't talk to enough potential customers, we'll never achieve the closes we need. That's why it make sense to measure both pitches and closes.
2. Simple. Financial statements are not simple; they demand complex interpretive analysis. But you need straightforward feedback you can use to take action.
If you have a staff, you need information that means something to them. Financial statements will only make their eyes glaze over. And it's completely understandable if they do the same to you.
3. Timely. Your KPIs must be measured with a timeliness that allows you to respond immediately. Daily results are ideal, but weekly measurements may be sufficient.
Tying it all together. Once you've determined the KPIs for your business, you will want to assemble them in an easy-to-understand “dashboard.” Your dashboard, like the one in your car, will give you the information you need to “drive” your business.
Summary. If you're relying only on your financial statements to tell the story of your business progress, you're getting an incomplete picture. While your financial statements may provide an appropriate “report card” of your business results, their value is more as an historical record rather than a business tool. You need tools that you can use day to day to improve your business.
Do you need help determining your KPIs and setting up a dashboard reporting mechanism? Contact Counterpart CFO for a free, no obligation consultation.