There are two huge reasons that businesses fail. They either measure the wrong things or fail to measure at all.
Metrics are critical to businesses but oftentimes the wrong things are measured or things are measured inappropriately. This is why every business owner must know two critical measure terms: Key Performance Indicators (KPI) and Key Performance Drivers (KPDs).
KPIs and KPDs
Simply put, KPIs are the result of what actually happened while KPDs affirm the action that brought about the KPI.
Now, it’s critical to recognize that KPIs are things you measure, not goals. It’s just data. In fact, many may have heard the term KPI and stray as far from it as possible but when you realize it’s just data, it’s not only less scary…it’s incredible.
The more you understand about measurement the more you’ll love it. The things I measure improve and the things I don’t decline. So, if I want to improve anything at my business or anything in my life, I need to measure.
All About the Honey
Let’s look at honey, as an example. Honey would be the KPI and bees the KPD. KPIs are quantitative values that demonstrate how effectively a company is achieving its objectives . We can see how much honey was produced and within what timeframe. KPDs are the activities necessary to produce the KPI results. Bees are the KPDs because they produce honey.
Now, it’s nice to know that these measurements exist but you need to understand them both more fully so they’re practical and applicable to your business. KPIs and KPDs are not only helpful pieces of data, they are critical ingredients to your success.
There are three KPIs that should be measured: purpose, production, and profitability.
Purpose, Productivity, and Profitability
There are three Purpose KPIs. The first Purpose KPIs look directly at the customer base. They tell you how many customers you serve and how well your product or service improves the life of the customer. The second purpose KPI is about human investment and this deals more with the charitable opportunity the organization has. The third Purpose KPI measures the impact the company has on your family.
There is a simpler way to understand the Purpose KPIs and that is by answering each of these questions for your organization:
What do I want to measure in terms of the quality of life I bring to my customers? (customer)
What do I want to measure in terms of charity I can bring into the world? (charity)
What do I want to measure in terms of the impact that this will make on my family and future generations? (family)
Productivity KPIs measure reality. If I walk into my garden and don’t see any vegetables, it could be that I have the wrong soil, it didn’t rain, or I neglected to plant seeds. When you look at productivity there are three things that typically end up on the KPI sheet.
Cash flow, profit-loss statements, and customer volume makeup profitability KPIs. Cash flow concerns the amount of money that came in while profit-loss statements track both income and expenses and are composed of 3 factors:
Once you’ve established how much money you have coming in as well as the quantity of new jobs compared to your existing customer base, you can better understand the dynamics of your organization.
Bread and Butter
The bread and butter of your company are your customers that keep your business in existence. If I have 12 different product lines but six of those produce 80% of the income, these are my bread and butter customers. These bread and butter customers for your line of profitability, the activity that yields actual gain.
Once you establish profitability, you want to look at profit margins. Profit margins is income divided by revenue. So, if I want to get a full picture of profitability, I need to examine all of my product or service lines. This makes more sense if we go back to the example of 12 product lines.
Each product or service line will have a profit margin so I sell let’s say a shoe on 1 and make a 10% profit margin, I keep 10 cents on every dollar but on product two I have a 40% profit margin, I’ll get to keep 40 cents for every dollar.
But, this data only tells a one-sided view. We need another view of the numbers and this is where overhead comes in. Overhead is the amount of resources associated with running a business. If overhead was 50% last year that means for every dollar spent, I kept 50 cents. My next thought would be how can I get my overhead from 50% to 49% so I can keep 51 cents for every dollar spent.
All of this makes more sense within the context of a business model. Listen to the 12 Step Growability Model and invest some time listening to that series. You will walk away with practical steps you can take to improve the systems in your organization.
Participation Trophies and Score Cards
Imagine playing basketball except we decided to not keep score. Everyone is going to get an award no matter the outcome. By taking away the score, you’ve deflated the motivation. If I don’t have a score, what’s the point? I mean we can play for fun, certainly but when it comes to business no one should go to work for a participation trophy but that’s exactly the culture we breed when we decide to not measure KPDs.
Excellence isn’t an accident. Excellence is built on processes and performance. Companies can’t win using participation trophies; they need excellence and to build excellence they need to be able to measure everyone on the team. For myself and everyone in the organization to see what it takes to win, I have to build a scorecard wherein I answer at minimum these three questions:
What was the expected result?
What was the actual result?
How does this connect to my KPIs?
Score cards provide valuable feedback for everyone on the team. They can use the data to edit their flow and productivity. Your team can look at the data from projects, quarterly earnings, productivity output, or any other set of metrics to help determine the best path forward. It also helps incentivize the work. People can actually see what impact their work has on the whole.
Organizations win based on their processes and feedback. Score cards combined with dashboards give everyone the upper hand. If you want to grow your business so you can reach points of excellence, learn what to measure, and how to communicate that in the best way, you need to contact our team.