Developing Key Performance Indicators
Developing Key Performance Indicators Starts at Startup
The developing of key performance indicators should starts before your small business is in business. You will gain valuable insights into planning and documenting your business venture by doing it on the frontend. Developing key performance indicators (KPIs) and measuring business performance in your small business should not be complicated. Your key performance indicators (KPIs) depend on your strategic goals, business complexity and the nature of the operations. Read our blog Where Performance Measurement Fits Into a Small Business
Start by measuring only those things that are important/critical for your small business success. You can always refine business performance ratios and get more sophisticated, if justified, over time. Prepare a simple spreadsheet with the quantified output/input measures and calculations for your business performance measures. Make projections and set goals for future performance levels.
Also read our blog “Performance Measurement Defined for Small Businesses” and “10 Good Reasons for Small Business Performance Measurement”
Requirements for Performance Indicators
Performance Indicators should be SMART:
- Relevant, and
Performance Indicator Terminology
Important performance indicator terminology that is used in the 5 Easy Steps in Developing Key Performance Indicators include:
- KPA (Key Performance Areas): Main areas of outcomes/outputs for which a person/group is responsible or accountability.
- Measure: A number or quantity that records a directly observable value or performance.
- KPI (Key Performance Indicator): A ratio of measures indicating how effective a business is achieving key business objectives.
The 5 Easy Steps in Developing Key Performance Indicators for Small Businesses
The 5 steps in developing key performance indicators are as follows:
- Define Key Result Areas (KRA): Based on the analysis of the functions that your small business needs to perform (or is performing), define the Key Result Areas. Keep in mind that someone (or yourself) needs to be responsible or accountable to meet the agreed business performance levels of every Key Result Area. It could be as simple as Sales Performance, Operational Performance, Logistic Performance, Financial Performance, Customer Service Performance, Organization Climate, Social Responsibility & Compliance, Innovation & Development, etc.
- Identify the Type of Business Performance Measure: Once you have defined your Key Result Areas, decide what type of small business performance you want to measure. Is it Quantity,
Effectiveness (getting job done), Efficiency (standard), Utilization, Quality, Timeliness, Waste, Yield, Safety or Work Climate?
- Define Your Outputs: Subsequently, you need to decide on the output units of measure associated with the type of business performance measure. In defining units of measure, it could be useful to consider each of the 5 Ms; that is Manpower, Materials, Machines, Methods and Money. Examples of unit measures are: customers, sales, items, inventory costs, working hours, inches, households, documents, incidents, visits, cases, damaged products, etc.
- Define Your Inputs: For each of the output units of measure for a specific type of business performance measure; what do you need to achieve that output. That is what are your input units of measure. These are similar measures as listed above. Measures could be an input or output, depending what you are measuring.
- Define Your Small Business Key Performance Indicators (KPIs): Your business performance ratios measure the relationship between your outputs and inputs. The small business key performance indicators are therefore, simply the outputs divided by the inputs. Examples are Customer Complaints per month and Gross Profit Margin (Gross Profit divided by Sales).