How to use performance indicators
Checklist
- Focus on the areas which affect profitability and cashflow: sales, costs and working capital.
- Identify the key drivers which significantly affect performance; these might include factors which have a major influence on quality, customer satisfaction and costs.
- Monitor indicators which reflect your strategic goals. If you aim to expand your customer base, track the number of new enquiries.
- Look for indicators which are measurable, such as number of complaints - rather than qualitative assessments such as 'customer satisfaction'.
- Aim for direct indicators, but use indirect ones if necessary: for example absenteeism as an indicator of employee motivation.
- Look for indicators which can be targeted either by comparison with historical performance or by benchmarking them against other companies.
- Consider indicators which demonstrate efficiency. Monitor defect ratios, levels of production wastage, the conversion rate of new enquiries into sales, or delivery time.
- Focus on a small number of key indicators to monitor at board level; leave more detailed, subsidiary indicators to individual managers to monitor.
- Identify any external drivers - such as foreign exchange rates - which need monitoring but are beyond your control.
- Decide how frequently to monitor each indicator. Some figures - such as the cost of premises - might only be reviewed annually, while sales progress, cashflow and credit control should be reviewed weekly or even daily.
- Present the information in a way that demonstrates the trends and highlights the significant variations - using graphs or charts can be particularly effective.
- Dig deeper into areas where performance levels have changed unexpectedly; identify the reasons behind the change
- Take action.
Cardinal rules
Do:
- understand the key drivers of success for your business
- ensure indicators are measurable
- set targets
- investigate unexpected changes
- use performance indicators to drive improvements
Don't:
- try to monitor too many indicators
- ignore important activities because they are difficult to measure
- monitor unimportant indicators just because they are easy to measure
