Understanding business performance involves far more than what is displayed in the common financial statements that most people are familiar with, even if only on a high level basis. Over 80% of small business owners feel they need to do everything themselves; there is a fear that someone else will not do the same quality work or have the same level of commitment. Given this it is not surprising that many small business owners don’t have an effective and efficient way to measure business performance.
Moving beyond daily financial and accounting matters is critical to making more money more easily. People get busy in small business and often times critical items are missed or delay, causing problems in some shape or form. It’s a fact that it cost ten times more to earn a new customer than keep an existing customer happy. Know what makes your business tick, not just the revenue, expense and human capital functions.
To truly understand current performance and gain insight into future outcomes we need to identify business drivers, also called Key Performance Indicators. Key Performance Indicators or KPI metrics are an important concept for improving operational performance and hence business results. A KPI is a measure that directly affects a business outcome or achievement of a KPI. These KPI metrics can be:
• A leading indicator or early warning that a situation exists that if not addressed will lead to a poor result;
• A performance metric that is associated with a preceding step in a value stream or business process; or
• A metric that contributes directly to a KPI and may be a component in the way the KPI is calculated.
Performance drivers can be used as part of a closed-loop, continuous improvement model. This involves monitoring measures and drivers against targets, goals or best practices, identifying issues, understanding the nature of those issues and then determining the best actions to correct those issues. A performance management platform that delivers the key performance measures and drivers, and supports the continuous improvement model, enables everyone making daily operational decisions to determine the practical actions required to improve the performance of operational activities and hence business results on an ongoing basis. By definition, KPI metrics measure aspects of business processes or the customer value stream that directly affect results or outcomes. If KPIs are actionable and monitored in a timely continuous manner, they can be used to make operational decisions and drive actions that can positively impact business outcomes in the current period.
A Key Performance Driver might itself be able to be broken down further into component parts. To better understand what is happening, we may want to look at trends over time, variances from a budget or reference metric, or period over period comparisons, to determine if there has been a gradual decline in performance or a more abrupt change which might signify that a significant event such as a failure occurred in the environment. To take the trending further we may want to see a forward projection based on the trend (with associated error ranges) to determine if we are seeing a single abnormality or a systemic issue that will affect future results. This could also be determined by examining a control chart to see if there are multiple occasions where the KPI metric is outside control limits. We may also want to use Pareto charts to identify the most significant contributors to a particular issue or performance trend. After this analysis there may be multiple alternative actions that could be taken. In the real world it is generally not a good idea to make too many changes simultaneously as that makes it very difficult to determine cause and effect. Ideally we would apply a single change or perhaps a small number of changes and monitor the impact before taking further action. This means that we must first identify the change or combination of changes that will have the largest positive effect before taking action. One mechanism for achieving this is to perform several “what if” scenario analyses to derive the expected results from various changes. We can then select the scenario with the best outcome and implement the changes required to execute the plan.
Optimizing operational performance is critical to business success and improving business results. In order to do so, the metrics related to your operations need to be continuously monitored to identify performance issues or situations that will lead to performance issues. Once a situation has been identified it must be quickly diagnosed and corrective action taken.