Identify Performance Indicators to Trigger Growth
It’s a new year and many businesses start with setting goals for growth. Many of those targets may seem like they come out of thin air at times, based on wishful thinking or unrealistic expectations. Often, the result is missed targets and lowered expectations for the future.
A sound method for setting growth targets will not only prevent frustration, but it will also drive a company forward in a sustainable manner. Also, using performance measurements as the foundation for setting milestones and objectives results in a realistic pace.
The good news is that this process is not a mystery. First, you choose what performance areas to measure; then you set growth targets based on what your measurements tell you.
However, there are so many trackable parts of any business, from sales to ROI to productivity, it can seem confusing when trying to choose a few essential aspects to follow. The first way to start narrowing down your choices is to set some standards.
Standards for Key Performance Indicators
To be sure that your KPIs are valid and vital, it is important that they meet some standards. The following standards apply to all useful KPIs.
Your performance indicators should tie in with your company goals.
For example, if a company goal is to capture 20 percent market share, it won’t be useful to measure an unrelated metric, such as depreciation on office furniture and equipment. A more likely performance indicator would be sales.
Make your KPIs tangible.
Choose indicators that are real. Stay away from vague things like morale, attitude, enthusiasm, or dedication. These are appropriate for employee evaluations, but not for KPIs.
You must be able to measure performance with numbers.
Trying to get a “feel” for how well the business is doing in any given area will immediately introduce subjectivity in the form of optimism or pessimism. Your KPIs must be quantified.
The performance must be something you can act on.
Measuring something like inflation or interest rates can give you good information, but you can’t do anything about them. However, you could measure the business’ profit margins or accumulation of debt. Both of these would be related to inflation or interest rates, but they would be actionable.
The measurement must be repeatable and consistent.
Quirky and intuitive methods of measurement have no place in tracking performance. The process must be something that you can repeat on a regular basis. Otherwise, comparisons will be disjointed and irrelevant.
Looking for Growth Triggers
Once you have set standards, you can narrow your choices further by determining which indicators have the potential to spark growth. This requires a thorough knowledge of the business and the industry, so management needs to buy into the process and help drive it.
Here are some useful performance measurements in three key areas. Addressing any of these could trigger growth.
Consider measuring the dollar amount of sales that come from repeat customers. That can show you whether retaining customers is a trigger for growth. On the other hand, if you think you are already at the maximum for earning repeat customers, then this metric won’t contribute to the pace of your growth.
Measure the number of customer complaints received/items returned. That will show you to what degree you are delivering value to the customer. If you have a high complaint rate, this performance indicator could be one to measure to make decisions about growing the business without having to acquire new customers.
You might look at the number of calls answered without putting callers on hold. This indicator will show you if your advertising dollars are going to waste. If you spend money and effort getting customers to contact you, only to put them on hold, you may be losing sales. Growth could result from improving this metric.
Financial Performance Indicators
Gross margins are an essential way to measure profits. If your costs of sales are eating up your revenues, you may not need to sell more; you may need to cut expenditures.
Another financial indicator that can be useful is the return on capital. This will show you your net profit as a percentage of capital. If investing in the business is not making more than you could earn in other investments, it may indicate that growth is not a matter of putting more money in, but rather a matter of putting it elsewhere.
Keeping track of efficiency ratios will show you how well your assets are performing. Many companies seeking growth assume more assets are the solution, but it may be that better efficiency in using existing assets will produce growth.
Depending on the type of business, the profit per employee can be a useful indicator to track. Since payroll is commonly the most significant expense of a company, determining how much profit you get for your payroll dollars can be extremely useful.
The number of hours spent on various projects will tell you if you are managing effectively. A project that produces little profit yet utilizes many employees can hamper growth.
Keeping track of your employee retention rate may help you understand the potential for business growth. It costs much more to recruit and train an employee than it does to retain one. If you are continually replacing employees, you might stimulate growth by keeping experienced employees.
The above are examples and are not exhaustive. Many more useful measures exist. A manufacturing concern could measure the number of unusable products produced, inventory turnover and shrinkage, and the hours necessary for each completed unit.
Use the examples above to get started looking for the performance indicators that would be useful in your company.
Setting Growth Targets
Once you set a baseline, which is the first recorded measurement of your KPIs, you can configure your targets.
It is important to realize that targets are not objectives. Objectives are high-level and have a scope that involves the entire business. For example, an objective might be to cut costs by 15 percent.” That is admirable, but it doesn’t tell you how to achieve it.
Targets, on the other hand, deal with the nuts-and-bolts activities that will lead to the objective. Consider how measuring the number of hours needed to create a finished product can lead to setting a target of 25 hours versus the current 30. A set of targets like this, when coordinated, can lead to the achievement of the objective. Marks are small, manageable efforts that are easy to track.
Keep it Real
We would all like to double sales in the next month, but that’s not likely to happen. Don’t think in terms of taking one giant leap, rather of putting one foot in front of the other. Steady progress is more reliable than unfettered hopes.
Keep the Clock Ticking
Tasks you are going to get around to “someday” never happen. Put a time deadline on your targets, which is another place to keep it real, but make it challenging. It’s also a good idea to check in with your team before the deadline to let them know how far along they are. When they get down to one week left, they are likely to put in extra effort to reach the target.
The Bottom Line
If you methodically identify performance indicators that have the potential to trigger growth, then set targets for those signs, you are likely to succeed in your plans to make the business bigger and better. Note that the indicators all need to work together, so someone needs to manage the process to make sure the entire company heads in the same direction.
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