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I normally begin with a \u201cQuote of the Week,\u201d but I wanted to talk about Key Performance Indicators (KPIs) and didn\u2019t really have an appropriate quote for that topic.\u00a0 <\/span>So I guess this is a \u201cTip of the Week.\u201d<\/p>\n While monthly financial statements provide vital information to the management of a business, they have a significant flaw: they are ancient history by the time we get them.\u00a0 <\/span>There\u2019s not much we can do about events that shaped our financial condition when those events happened four, five or six weeks prior to our seeing the financial statements.\u00a0 <\/span>So we really need an early warning system . . . quick snapshots so we can see, on a weekly or even daily basis, how the business is performing in key areas.\u00a0 <\/span>These are Key Performance Indicators or KPIs.<\/p>\n KPIs are different for every business, but there are a few that are fairly universal.\u00a0 <\/span>For instance, many businesses track sales on a daily or weekly basis to make sure sales are on pace to meet that month\u2019s goal.\u00a0 <\/span>Cash flow is critical to all businesses, so virtually all of them will watch how efficiently and effectively they are able to collect their receivables.<\/p>\n Then there are KPIs that are not necessarily universal.\u00a0 <\/span>If you are a wholesaler or a distributor, you probably need a KPI to make sure inventory levels are where they should be.\u00a0 <\/span>If you are a manufacturer, you might need a KPI to watch waste levels, or another one to watch manhours per unit produced.\u00a0 <\/span>A service business, on the other hand, may not have inventory or waste to worry about.\u00a0 <\/span>It may be more concerned about billable hours vs. non-billable hours, or how many proposals are going out the door per day or per week.<\/p>\n The point is, you need to understand what indicators are the most critical to diagnosing the health of your business.\u00a0 <\/span>And you shouldn\u2019t need a lot of them.\u00a0 <\/span>If they truly are \u201ckey\u201d indicators, you shouldn\u2019t need more than six or eight of them.\u00a0 <\/span>Think of it like this.\u00a0 <\/span>Suppose you\u2019re on vacation.\u00a0 <\/span>You\u2019re having a great time and you would really like to stay a few more days than you originally planned.\u00a0 <\/span>But before you do that, you better call the office to see how things are going.\u00a0 <\/span>When you make that call, you can ask six and only six questions to determine if you can stay a few extra days or if you need to hop the next plane home.\u00a0 <\/span>Those questions are your KPIs.\u00a0 <\/span>They are not intended to tell you how every last detail of the business is performing.\u00a0 <\/span>They are only intended to tell you that the most important parts of the business are performing within tolerances, and that the business is not in any imminent danger.\u00a0 <\/span>If the patient has a hang nail or a sore throat, that\u2019s OK.\u00a0 <\/span>We need to address those ailments, but the patient isn\u2019t going die from them.\u00a0 <\/span>But if the patient\u2019s heart is showing danger signs . . .<\/p>\n KPIs can be great tools to spot and address problems early.\u00a0 <\/span>Used correctly, they can be one of your most powerful management resources.\u00a0 <\/span>If you want to learn more about how to use them, pick up a copy of Kraig Kramers\u2019 \u201cCEO Tools.\u201d\u00a0 <\/span>He discusses KPIs at length, in easy-to-understand terms.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":" I normally begin with a \u201cQuote of the Week,\u201d but I wanted to talk about Key Performance Indicators (KPIs) and didn\u2019t really have an appropriate quote for that topic.\u00a0 So I guess this is a \u201cTip of the Week.\u201d While monthly financial statements provide vital information to the management of a business, they have a<\/p>\n