What the Fudge is a KPI?
Yes! I’m trying to keep this clean, so I used “fudge” in the title. But seriously? How often do you hear the term “KPI”? In this new world of bookkeeping and accounting, “KPI” is used just as much as “advisory services”. So, let’s dive into this, shall we?
What the Fudge is a KPI?
First off, KPI means Key Performance Indicator. That can be clear as mud right there – or maybe fudge! I feel like the term is thrown around a lot, but not many people are explaining it. If you’ve heard me in any of my training sessions, there are just words (or terms) out there that make me feel dumb. I know I’m not alone and I worry that KPI is just one of those terms.
KPIs and Dashboards
Imagine you are in the driver’s seat of a car and you are looking at the dashboard. It gives a ton of information. It can tell you how fast you are going; if your tire pressure is low; if your brights are on; and more. All of this is important information to have when driving a car. You can also think of it as that they are key to determining your car’s performance. See what I did there??
KPIs in Business
So, when you are running a business, there are things that we look at to determine if the business is healthy and performing well. These are our key performance indicators. Usually, we are using some calculation or ratio to come up with a specific indicator. But, that indicator doesn’t do anything unless we know what it means and more importantly, what it looks like if things are bad and what it looks like if things are good.
Understanding the KPI and how it relates to the performance of a business is probably the most overlooked part of explaining KPIs. People just say look at the liquidity ratio – and then my eyes roll back in my head. Think about how our clients feel!!
Communicating Performance with a KPI
KPIs can’t be looked at in a vacuum. You need to have several things available when reviewing the results:
- The calculations used to get that fancy number (so we know what we are talking about)
- Our current performance
- What are the good and bad ranges of this KPI?
- Historical results for comparison
You can accomplish all of this with a dashboard-type view – and yes you can even do this in excel if you want to. The point here is that you have to give context to the numbers so that you can read what is going on and interpret what is going on with the business’s performance.
Setting Up KPIs For Your Clients
Now you have a better understanding of what a KPI is, right? Before you go out and start using them for all of your clients, you have to remember one thing – is that KPI really KEY to understanding the performance of the business?
Here’s the thing. There are a million ratios and KPIs out there. The problem is figuring out which ones will really help you build a customized dashboard for your client. If they don’t have inventory, then inventory turnover won’t matter. That’s pretty obvious. But, the point is to look at the client, understand where they are, their current pain points, and where they want to go. Then, you are able to start building out a dashboard and utilize some KPIs to help that client understand the business’s performance.
Another quick tip – limit the number of KPIs you use. One-two for different aspects of the business should be fine. If you had 100 indicators on your car’s dashboard, could you even find the important stuff anymore? This is the same situation. Less is more.