Key Performance Indicators are a time-tested method of measuring and analyzing the health of a business. Properly used, KPIs can not only document the historical performance of a company but also predict the near and mid-term future. Why do I think these measurements are so important?
I had the opportunity to begin my career at a Fortune 500 corporation and observe a traditional hierarchal management and control structure. While it was confining in many ways, I did learn that public companies are run by the numbers as much as by innovation and creativity. Daily, weekly, and monthly goals were set for me, and I watched senior management sweat out the quarterly and annual numbers so important to Wall Street. I learned to follow the money.
Key Performance Indicators can reveal so much about an operation. If you want to know sales numbers six months from now, examine the number of client proposals and demonstrations taking place this month. If you watch the A/R days outstanding and the rate of change of that number, you can anticipate that cash crunch next quarter. Might be wise to take down some of that line of credit in anticipation!
For the business owner, knowing the KPIs that are important in your business and following them closely allows you to course-correct in every department of your company before the ship wavers off course. Technology ensures we have a plethora of numbers coming at us, so sorting out the vitally important from the nice-to-know is key. Building a model to track KPIs and take swift action on changes of state will allow you to handle both explosive growth and economic/market downturns alike.
Ultimately, when the time comes to prepare for transition of your company, a concise historical log of KPIs and the resulting course corrections you have made will provide the future buyer a window into a well-run, smooth-running operation with predictable outcomes. This will enable you to derive maximum value from the transaction. Manage what you measure.