Need for Business Metrics
No two companies are exactly alike. Different product or service types, customer profiles, timelines, and patterns of staff communication and management call for different measurements to assess production and growth. All businesses, established or growing, must have ways of continuously monitoring the things that keep them alive, heartbeats.
Established businesses have found themselves falling short when they operate blindly on the basis of previously successful operative principles. New businesses must be on the lookout for stumbling blocks as well as sometimes subtle signposts toward the future.
Quantification of Business
What are these metrics (key performance indicators or KPIs) for your business and how do you put them into action so they can be quickly read and interpreted? First of all, key performance indicators must be quantifiable, that is they have to be well enough defined that one can assign values to them and they have to be tapped and assessed at regular (known) time intervals.
What are "values?" Values could be just presence or absence of something, they could be scaled on a rating scale, or they can be real counts or numbers of something. You have to have some way of obtaining these values regularly, putting them on some form of record along with their date or time parameter and then presenting them at regular intervals so management can follow how they change or progress.
When you choose metrics, you have to consider two sides of the coin, output and result. You have to measure what you and your staff are doing as a measure of the effort you put in and measure the result out in the marketplace. If you measure both sides you can begin to see how different actions you and your staff take affect the outcome.
There are many possible measures of output. These are things your staff is doing, including your sales staff.
- Number and quality of sales contacts. Values like number of sales contacts, kind of sales contacts, and duration of sales contacts.
- Efficiency measures such as marketing, inventory, shipping times, and the like.
There are two kinds of results measures:
- Financial/profit-production and indirect effects that may reflect how things will turn out in the future. These measures include sales figures and profits.
- Measures of customer interactions, attitudes, awareness, website hits, etc.
Which KPIs you choose depends on the nature of your business.
Most companies maintain elaborate measures of money movement, sales, costs, and the like. The KPIs on the financial side will probably be linked to your financial management system. Popular KPIs on the financial side include:
- Gross profit margin and operating margin--(how much money is made after direct costs of sales.
- Return on capital employed (ROCE)--net profit as a percentage of the total capital employed in the business. You can see how well your investment is doing.
- Liquidity ratio--available resources to meet short-term obligations.
- Efficiency ratio--how well are you using your business assets?
- Financial leverage or "gearing" ratio--how exposed are you to long-term debt?
If your business depends on customer relations, you have to find valid measures of the quality of customer relations. Many businesses use the number of customer complaints. Many businesses set up systems for customer feedback and tabulate the feedback regularly. Some businesses use systems to track the customers' journeys through their stores or web pages to measure customer reaction. Widely used customer-related metrics include:
- Proportion of sales from returning customers.
- Number of returned items.
- Time it takes to fulfill an order.
- Percentage of incoming calls answered within 30 seconds.
You may opt to go with a system of standard KPIs offered as a service. You can choose from hundreds of measures of performance based on your industry sector. Companies offer standard KPI reports that can be distributed in popular dashboard format through computer networks and smartphones or tablets.
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