Zenith Finance Blog

RBA Finance

Using your KPIs to drive the bottom line

In the current environment, reducing costs and increasing productivity are the keys to success.

Reading the business and finance sections of the digital or printed newspapers has become more depressing in recent weeks. Not only are we reading about massive slumps in commodity prices and export volumes which are impacting the big mining companies and all their downstream supply chain, but small business appears to be bracing for tougher times.

This was emphasised strongly by a June 2013 PriceWaterhouseCoopers (PwC) report which found that profits at the world’s top 40 mining companies, including BHP Billiton and Rio Tinto, have slumped by half since 2011 as the mining boom comes off its highs.

In their report, PWS noted that productivity is now a challenge. They go on to say that the Australian industry and governments need to focus on cutting costs and improving productivity as productivity in Australian workplaces continues to fall short. Their point was that a staggering 85% of employees could be more productive.

You can’t improve what you don’t measure

One key to increasing productivity is to measure productivity. It’s not rocket science; effectively measuring productivity allows organisations to identify what works to increase it, as well as making more employees aware of how their actions impact the business.

Whether you’re trying to improve the operation of an individual, a department or an entire organisation, key performance indicators (KPIs) are critical. There is however, a challenge, and that is that having KPIs is not necessarily going to deliver positive business outcomes.

Your KPIs need to be accurate, reliable, clear and relevant.

Business planning

If you start a new venture or develop a new product, everyone concerned needs to have benchmarks against which they are performing. If a new store is being opened, then each week, turnover and cost of goods sold needs to be tracked against forecasts and budgets. The KPIs for a new store might be:

  • Weekly revenue
  • Costs of goods sold
  • Inventory
  • Inventory turn

Against these KPIs a manager would have accountability on his or her performance.

KPIs can still be a complete waste of time if the person who needs to take action doesn’t understand what they mean or if the performance isn’t clearly communicated.

The critical success factor is designing, implementing and communicating KPIs using the best possible practices and principles to ensure that your KPIs are:

  • Effective
  • Relevant
  • Understood – and so can be acted upon.

In a nutshell, what gets measured gets done.

Exceptions and particularly important information should be highlighted – and most critically – the KPI ‘dashboard’ should support action not just within the most senior executive team, but right across the business.