Technology has enabled management to gather a plethora of information. We get minute-by-minute updates; hourly, daily, weekly … the list goes on. But does all this information help us make better decisions that will improve business performance? Or is it just too much data? Focusing on meaningful data helps you determine, in advance, what will have a direct impact on your business.
For virtually any business there are 11 to 13 key performance factors (KPFs) that affect operations; two to three of these data points are external factors and nine to 11 are internal.
External factors are those you have no control over; however, they have a significant impact on what will or can impact your business. For example, early in my career, I asked a client what do you monitor that has a great impact on your business. He told me that he watches box car movements, which are published in the Wall Street Journal. Using this data, he can predict how busy his manufacturing line will become, which determines what he will need in terms of raw material, and personnel, etc. Watching external factors can help you make important and timely decisions. It impacts your resources and deployment of those resources.
Internal factors are those management has control over. They are further divided into fixed factors and variable factors. There are two to three fixed factors that cannot change without direct management involvement. These include capacity, wages rates, and facilities. The seven to eight variable factors can change without direct management involvement and are divided equally into operational and financial metrics. Operational metrics measure non-financial performance, such as labor units, units of production, number of service calls, and number of customers. These metrics have a significant impact on operations, a direct impact on financial performance, and can often help anticipate what the monthly financial performance will yield. And of course, we have our financial metrics, including cash, line of credit, accounts receivable, inventory, sales, and gross profit.
The KPFs outlined here are important but shouldn’t preclude you from measuring other pieces of data that are important to your particular business. These simply have a significant impact.
Once you develop a process to measure these KPFs, it generally leads management to ask more questions and dive into other areas of the business. Having sound practices in place to regularly monitor these pieces of data can give leadership peace of mind that the business is heading in the right direction.
Regular measurement is a healthy process that often leads to a continuous improvement mindset. Measuring and monitoring leads to asking more questions, learning more about the business and working on how to improve its performance.
You can only effectively manage what you can measure. What gets measure gets improved. ●
Mike Pappas, CPA, CEPA is director of Barnes Wendling CPAs