Key Performance Indicators: Management Tools for Growing Businesses
Chances are you didn’t get into business to study financial statements, but growing businesses inevitably hit a point where gut feelings and checking the bank account balance are no longer telling the full picture of business health. That point is where an experienced advisor can help guide your business by identifying, tracking, and reporting on the Key Performance Indicators (KPIs) that lead to your business success. KPIs vary by industry and company to company, but a good KPI is a way to tell your business is on track, long before the financial statements are complete.
Examples of some KPI’s related to law practices would be:
- Billable hours
- Realization rate (amount billed as % of billable amount)
- Collection rate (amount collected as % of amount billed)
- Number of new clients
- Average fee per new client
What gets measured gets done and I think most people would agree that if a law firm set attorney by attorney targets for these 5 areas and accomplished all 5, they would be moving in a good direction.
Why use Key Performance Indicators?
The goal with KPIs is to communicate expectations for results that will drive business success. Business owners know the behaviors that will lead to a profit from years of experience, but employees need help to make sure they are on the same page. A good example of a business seeking to improve a KPI, average order value in this case, is fast food restaurants and the classic, “would you like fries with that?”. A drive-thru can only handle so many cars in a day, how does the restaurant increase sales? By suggesting additional items to add to an order. When restaurants measure average orders and encourage staff to maximize order totals they are getting the most revenue (and likely profit) possible from each customer that comes to their restaurant.
Every business is unique and the business environment is always changing; the KPIs and management levers used to improve results can vary greatly, even within the same industry. Maximizing orders could take a back seat at a coffee shop that can’t staff a location fully, in that situation perhaps pushing customers to simpler/faster to make orders is a strategy to optimize staff time and minimize wait times for customers. Sacrificing some revenue now to keep customers satisfied could be a good strategy in the short term while working on a fix for the staffing shortage.
How many KPI’s should I track?
My recommendation is 5-8 KPIs, as that tends to be the most that can be truly followed and managed at a company level. Individual departments or employees could have KPIs that are specific to their role, again quality is more important that quantity. This concept is detailed very well in the book Traction by Geno Wickman (https://www.amazon.com/Traction-Get-Grip-Your-Business/dp/1936661837).
KPIs should be measurable at varying frequencies. Some KPIs are best measured daily, others weekly or monthly, and only a few that go into quarterly or annual territory. The management goals around KPIs are to spot and correct negative trends before they have a serious impact on your business. Once you have KPIs identified it is important that you review results and take action when KPI targets are not met. The best performance indicators in the world are worthless if negative results are allowed to continue without correction.
I hope you are tracking and managing KPIs in your business. If you aren’t tracking KPIs yet and you’d like help to get started, I’d love to connect and hear about your business and brainstorm the areas that make the biggest impact on your business’s bottom line.