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.
You are in your car and suddenly you find the two-lane highway narrowing to one lane. Traffic flow slows to the pace at which two lanes of traffic can merge into one. Your speed of 60 slows to perhaps 20 and can even be a stop and go to move ahead one car length. This is a bottleneck.
Bottlenecks are occurring everywhere in the business world. Bottleneck in business happen in the processes employed in every business. They happen in production, distribution, fulfillment, billing, filing, etc. They happen in manufacturing companies, distribution, retail, construction, real estate, consulting, financial services, and service businesses of all kinds. Bottlenecks are rampant in non-profits, and in government and the bureaucracies they employ.
I believe the primary culprits that cause bottlenecks are these:
- Inadequate infrastructure—capacity has topped out
- Inefficient processes—the quantity of raw material (or data) processed in a given time, known as ‘throughput’ has topped out
- Poorly trained workers—individual production has topped out
Capacity constraints affect a company’s ability to grow. Firms that find themselves bumping up against their system’s capacity constraints soon find that growth has stopped; profits begin to decline unless expenses are cut accordingly.
Any part of your business that has a capacity bottleneck will find the production and efficiency of everyone reduced to the speed of throughput at the bottleneck. The operation will slow to the lowest common denominator—the productivity at the slowest part of the process.
For example, if a bottleneck is reducing throughput by 30%, and your customers are unwilling to wait in line, your sales levels could be 30% lower than what they should be. How much margin are you losing at the bottleneck? If your normal throughput is $1,000,000 annually and the bottleneck reduces it by 30%, you have a new sales level of $700,000. At a gross margin of 60% applied to the lost sales of $300,000, the lost profits amount to $180,000! And this is just a one million dollar organization!
Worse yet, are you paying for “stand around” time while the under performing parts of your process “catch up” to the rest of your production?
What could you do with the money that you are leaving on the table?
As for the government bottlenecks, they just seem to throw more people and money at it without addressing the three culprits. And you and I are paying for this bad practice as government and bureaucracies have become the largest employer of record throughout our entire economy!
If you are concerned that your business is leaving money on the table due to bottlenecks, and want to quantify the expense and explore alternative solutions, please contact me directly at firstname.lastname@example.org or 630.269.7646. I’m available to discuss options to unlock the revenue and increase cash flow.