Fall 2006 issue of Horizons

Key Performance Indicators: Building

Mike Lewis, CPA

Rick Feldt, CPA

One of the keys to effective financial management is regularly monitor- ing the “critical factors” that determine the

success factors are clearly defined, it is a fairly straightfor- ward process to identify potential KPIs. Key employees are actively involved in the process, and the work is often done in teams. In fact, major breakthroughs usually do not come from management but from teams and workgroups. Prior to implementation, you should answer several questions to assess the potential effectiveness of the KPIs you have developed.

success of your business. Traditional financial statements are not well suited to accomplish this objective. Instead, many companies use a short list of key measures that can be communicated periodically (e.g., weekly or monthly) to track the most important areas in their businesses. These meas- ures are called Key Performance Indicators (KPIs). KPIs are quick measures of a company's overall health and well-being. In essence, KPIs are a report card to tell how your business is performing in critical areas. As a result, the use of KPIs allows you to quickly get a clear picture of what is hap- pening within your business, identify early trends and predict future profitability.

• Is each KPI selected SMART? Each KPI developed should fit the criteria outlined below:

Specific…clear and focused Measurable…quantifiable and comparable Attainable…achievable, reasonable and credible Realistic…fits your culture and organizational constraints Timely…communicated within a reasonable time frame • Is each KPI a leading or lagging indicator of your compa- ny's operation? Leading indicators are preferable, as they are helpful in predicting future results and allow your man- agement team to be proactive. • Do the KPIs selected fit your company's culture? In cases where you are trying to improve your operations, does each KPI move your company toward the end goal? In those instances where you're satisfied with your manage- ment team and operating results, does each KPI reinforce existing conditions? • Are the total number of KPIs selected manageable? The number of KPIs measured and managed at any point in time should generally be limited to five or less.

Development and Implementation of Key Performance Indicators

The first step in developing a robust KPI system is to identify the critical success factors for your company. These are the key areas that must be operating effectively and efficiently for your company to remain competitive and succeed. Each KPI should measure a business process that has a direct impact on your bottom line. Additionally, the business processes ulti- mately selected to be measured should have the greatest impact on your profitability.

Once your critical success factors are identified, you can begin identifying and developing your KPIs. If your critical

19 • summer 2006 issue