Introduction to Key Performance Indicators (KPIs), Measures and Targets for Small and Medium Enterprises (SMEs)

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Key Performance Indicators (KPIs) are the means by which an SME owner/manager regularly monitors progress against the targets established within the annual business plan for the enterprise.

The annual business plan should inform both the budget and cashflow projections for the year. Analysis of any discrepancies identified through close monitoring of progress against the annual business plan form the basis for making timely decisions re corrective action.

With the annual budget and cashflow projections in place, the owner/manager is then able to determine a set of internal performance indicators, targets and measures for the year.

A performance indicator is an agreed standard against which success can be measured – thus establishing a satisfactory and effective framework for the owner-manager to monitor and measure success.

Where a set of performance indicators is introduced, no more than 10 should be developed. They should facilitate judgement on the extent to which the objectives for the enterprise are being or have been achieved, by monitoring specific factors that are critical to success.

Some examples:

  1. measurable targets in financial terms over specific periods
  2. factors of growth and improvements in sales/income/profit
  3. safety and security
  4. customer satisfaction/repeat customers/customer loyalty
  5. staff satisfaction/staff turnover/staff absences
  6. product development/improvement
  7. performance information that addresses both effectiveness (outcomes) and efficiency (resources).

The owner/manager can also monitor the performance of key staff to compare the financial and operational performance of the enterprise with the annual business plan.

The role of performance indicators is to:

a)  provide information which enhances decision making, and
b)  to indicate, or focus attention on relevant areas which are doing very well or require further attention.

Performance indicators are couched in terms of appropriateness, efficiency, and effectiveness.

5 Basic rules – performance indicators:

  1. are measures of achievement, not of activity:
    • measures of how well an enterprise is doing something, not of how often,
  2. must always relate to objectives:
    • it is important that the objectives set are realistic and are achievable,
    • objectives should not be confused with strategies (strategies are how something is going to be done: objectives are clearly what/why),
  3. can only be derived for things over which the enterprise has control:
    • performance indicators are, to a degree, accountability measures – and the enterprise should only be held accountable for things for which it is responsible, ie things over which it has control,
  4. are expressed numerically with some form of comparison, such as ratios, percentages, changes over time, etc:
    • relative performance indicators like ‘better’ or ‘worsened’ can be used within this framework, provided that two conditions are satisfied:
      • the assessment criteria (what ‘better’ means for each task) are strictly defined, and
      • they relate to some benchmark, eg time, intake date, etc,
  5. must be easy to collect and use, and provide useful information:
    • performance indicators should be everyday tools for the enterprise and should not require ‘special’ work or ‘one-off collections’ to keep them running,
    • the critical issue is that they should assist in the management of the work – not be outside of it, adding unnecessarily to the work.

Performance indicators take time and money to develop and it is sensible to expect that the first set will require refinement and rethinking. A balance is necessary between cost and comprehensiveness – for example, where an enterprise is in the business of selling products or components rather than data collection, then data collection may have to take a secondary role to the business of selling.

Performance indicators cost money, because data collection associated with measurement costs money. Simple and useful indicators providing important information to an enterprise are more cost effective, especially in the long term.

This is again where the unbundling or task analysis approach becomes attractive, efficient and useful. It is particularly important for complex enterprises to remember rule number three above – they should only derive performance indicators for things over which the enterprise has control.

Criteria:

  1. for each major task or area of responsibility, list out all the things by which you can reasonably judge the success of a task, eg speed of delivering orders, customer satisfaction, cost of preparing products for sale, cost of sales,
  2. ask the questions: ‘how do we know when we are doing this thing well’ or ‘what does it look like when it is going well?’
  3. sometimes it is easier to understand the success of a task by starting with the negative ‘what does this task look like when it is going badly?’ or ‘how do we know when we have failed?’: the answers often highlight the criteria for success, and
  4. check that the criteria have some real meaning for the enterprise.

Checks which must be applied include:

  • does this indicator relate to the objective?
  • is it about achievement?
  • is it within our control to obtain this result?
  • is anything else likely to have a major influence on this achievement?
  • is it numeric – is it tied to an objective measurement?
  • how will the data be collected?
  • is it too hard or too costly?