How can you outsmart your competition and grow your company? Let’s say you are the owner of a small company. It is profitable, because bills are paid and money is in the bank. However, the company is not growing or becoming more profitable. Many companies devise corporate strategies to achieve these goals and some include very specific interim goals. But a great number of strategies are poorly executed and goals are not achieved. One factor that distinguishes great companies from many ‘also-rans’ is that they are very analytical; they have detailed, actionable information, and a deep knowledge of their entire value chain whereas many companies are data-rich, but information-poor. Key Performance Indicators (KPIs) measure factors that are crucial to the success of your company. KPIs are a way of measuring how the company is achieving its interim goals and therefore executing its strategy. These KPIs should be informative and specific to the decision maker that uses them and be ‘drillable’, i.e. a decision-maker should be able to drill down and see the various components that make up a single number. General Motors has the following six main KPIs: Market share, revenue, operating profit, cash flow, quality and customer support. Each one of these can be subdivided. Market share, for example, can comprise submarket models and analysis. A Balanced Scorecard is one common way to look at KPIs. This assesses the achievement of goals from a number of different perspectives; those of the Customer, Internal Business Processes, Financial Performance and Innovation and Learning.
In the GM example, four of the top six KPIs are related to financial performance, one is related to the customer and one is related to internal business processes. This is fairly typical of an owner or top executive perspective. Others, such as a VP of sales, would require different KPIs related to customer satisfaction, retention, acquisition and support. Now let look at the five KPIs a business owner needs to follow and which are crucial to the success of his business. These indicators need to be strategic. I have chosen five indicators which are all related to financial performance as they are important from a top-level point of view:
1. Sales growth. What are your sales and how much are they growing. For example, if you want to double your sales in five years, they need to increase by 15% by year.
2. Gross Profit. What is gross profit and the gross profit margin as a percentage of sales?
3. Net Profit. What is the net profit and what is net profit as a percentage of sales?
4. Return on investment. What is the net profit divided by the amount of capital you have invested in the business? Ultimately, running your business has to be more profitable than putting your invested money in the bank or buying publicly traded dividend paying stocks.
5. Cash Conversion Cycle. What is the time it takes to spend cash (on inventory, materials etc.) from the time it is collected through customer sales? Even if very profitable, a business must keep a keen eye on its cash to ensure that there is not a sudden cash crunch.
To improve your business, you need to review these 5 numbers on a regular basis.