Here’s how to learn whether your company is trending positive or negative in key performance areas.
In my last blog, I told you about a family-owned business I counseled. The firm appeared to be doing well, but had no way of knowing whether its performance was trending positively or negatively. My assignment was to give company officers a means of gaining that insight, through the use of key performance indicators.
The company mentioned is a Web-based business that takes orders through the Web into its system. I first needed to learn how many product lines the company offered. Once I learned that, I identified three different measurements that we would need to help us gauge the cost of producing the revenues that flowed from those lines.
First, we had to determine the direct costs, or in other words, the cost of goods sold. Second, we had to determine the employee cost, split out including payroll tax and temporary help. Finally, we had to determine all other overhead.
Using the revenue from the product lines, we knew the consolidated revenue for the company. From that number we could calculate the average unit selling price. Next, I determined average unit cost for each of those three areas: direct, employee and overhead cost, and came up with total unit cost per period.
When we arrayed all the indicators, we had a lineup of direct costs per unit, summarized for the year. Those costs were clearly coming down. We then looked at the employee cost per unit, and compared that to the average selling price per unit, and that relationship was trending positively. The same was true when we compared overhead per unit with average selling price. We could also determine from those numbers what the unit gross profit was for the company.
Simply put, once we had the unit measurements in each area, we could plot and compare them period to period. Those plot lines revealed trends, and just as quickly, we knew the trends were positive. That knowledge made possible a discussion with management as to why those trends were occurring.
Whether your company is generating reports, offering consulting services, or selling gallons of oil, key performance indicators can determine important trends.
There is a way to measure the company’s performance using two ingredients: the number of employees on staff, and your output.
If you would like assistance in determining and tracking key performance indicators, please contact me. I offer a 100 percent guarantee on my work. I take on only clients I can help. Call me and let’s talk about your business. My phone number is 630-269-7646.
Key performance indicators that offer important insights into your company
Recently, I assisted a $10-million-a-year, Chicago-based, family-owned company that was anticipating significant growth. The company’s problem was that managers did not know what data they should be tracking to illuminate their operating trends and performance.
The firm’s officers also did not feel they had a handle on their key financial indicators. Once inside the company, I determined that we should look first at the performance indicators, and secondly at the financial indicators, to gauge how well the firm was performing in terms of productivity.
The company was at a point where the second generation had begun to assume leadership. The son, who had a track record of success, had been brought in to learn the business, so he could eventually take the reins.
However, his background did not include finance. The business was starting to grow rapidly due to the son’s efforts. I found the firm had a clean operation, but wasn’t sufficiently sophisticated to try to compile these performance indicators.
Firm managers knew they were doing well from a cash-flow standpoint, but had no measurement system to see if they were better or worse vis-à-vis the previous quarter or previous year. In short, because they didn’t know what trends were taking place, they didn’t know if the firm was trending positively or negatively.
In measuring key performance indicators, you first define the indicators you want to gauge. Some indicators can be compiled in relation to sales, others in relation to employees. Then you line them up quarter to quarter, and month to month, and have a year-to-date measure as well. This way, you learn whether the indicators are moving positively or negatively year to year, and within years.
Back at that company, I asked for the last three years of financial statements and operating statistics, to learn how much was being sold to create the revenues, margins and profits. Having ascertained that what was being sold was reports, I needed to learn the volume of unit sales, and simply concentrated on the number of reports sold. I thought about what happens from the time a customer orders their report to the time the report is issued.
The numbers helped me put together some key indicators to start measuring the company’s productivity and efficiency. As a result of identifying these key performance indicators, the company managers were now well informed, and the indicators showed their company was trending positive.
Here’s the takeaway from this success story. In a fast-growth environment, you must understand what you’re measuring, and what it means.
That’s what key performance indicators provided for this business, and what they will provide for yours. Next time, I’ll show you, again through the example of this company, how to generate and track key performance indicators.