In his regular column, Aaron McLeish discusses the role KPIs play in a successful business.
KPI stands for Key Performance Indicators and they are exactly what they say on the tin. They are key metrics of information which indicate how your business is performing.
KPI’s should be used by business owners to regularly assess how their business is performing. They don’t need to be complicated; in fact – the simpler the better. The key to success when using KPIs is carefully selecting the metrics that are most relevant for a specific company’s goals. What do you want to achieve? Increased turnover? New customers? More five star reviews? Convert more quotes?
If you fail to plan, then you plan to fail.
You could use information taken from your accounting data or other key metrics within your business. I would always only suggest having a handful of KPI’s which you constantly measure, tweak and report on because if you have too many they won’t get done and too few doesn’t really give you a feel for how the business is going.
It’s good to start with a metric that is easily measurable: you have the data to hand and you can calculate with ease on a periodic basis.
An example of KPI’s that a plumbing and heating business could measure is gross profit %. Goss profit % is calculated by:
By knowing what your current GP% is, and having a KPI to monitor and increase this periodically, this can drive your performance.
For example, what can you tweak within your business to achieve your desired GP%? You could increase prices, request discounts from merchants, promote products and services which have higher gross profit margins, the results of these examples will all increase GP%.
Maybe you have a target for what you want your turnover to be by the end of the year. In that case, break it down over 12 months so you can easily measure if you are on track to achieve your goal. The monthly turnover target will then be a KPI. You can then ascertain whether you are on track to your year end target or not by looking at your monthly turnover. If you are not on track, ask why not? Look into your business and establish what you can tweak to get back on track.
Taking measures
Another metric you could track readily within your plumbing and heating business is your quote conversion rate. What percentage of your quotes do you win? To calculate this metric is simply a case of (total quotes won / total quotes sent out) x 100 = Quote conversion rate.
You could track this over a period of time. Now lets say that you want this metric to be at 40% but it is currently at 30%, what can you do within your business to ensure you win more quotes?
This is where the KPI’s come in. It is a case of having key information on your business which ultimately lead to the overall business goals. If you want to convert more quotes, establish what your quote conversion rate is, what do you want it to be and then react accordingly to make sure you win more quotes. What do you need to do to get to your desired performance?
If you are new to KPI’s start by choosing simple metrics to measure for your business. Once you are in the habit of keeping the records up to date you could introduce KPI’s for staff. For example, you could set a target to get X customers a month on a maintenance plan, reduce the number of call return visits, increase the number of same day fixes or receive a certain number of 5 star reviews.
Whatever you choose to measure, they should compliment your long term business goals and plans.
When properly used, KPIs can offer visibility of progress towards your business goals, help create focus points, drive improvement and monitor customer satisfaction levels. They can also be invaluable in measuring overall organisational wellness and ensuring long-term sustainability.
As the director of Together We Count, Aaron McLeish is an accountant specialising in the plumbing and heating sector. Aaron is also author of The Quote Handbook. Visit the website here:www.togetherwecount.co.uk
