Key Metrics

Businesses tend to chug along from day to day without a long-term plan, or, if they have a plan, without any way of measuring their progress against it.

In this situation the problem lies in knowing how to measure progress - instinct and gut feeling are notoriously faulty. Yet, whatever your business, it is not only possible, but quite easy, to assess the health of your business by using a simple set of measurements called key indicators.

Key indicators are a handful of figures that allow you to measure your progress by quantifying the essential elements of your business. They fall into two categories:

Key Operating Indicators which demonstrate how well the different aspects of your business are working.

Key Strategic Indicators which demonstrate how well you are progressing towards your goals.

Both these can be split further into tangibles, such as sales and growth rate, and intangibles, such as customer satisfaction.

Key objectives can either be ratios (for example, stock/turnover); percentages (growth in sales over last quarter); rankings (market position); or absolute figures (number of customer complaints).

1. Identify what you want to measure from your business plan.

Look at your business plan and extract from it a verbal statement of your aims. Known as a 'strategic objective' statement, it will say something like this: 'Within the next five years, Bloggs Widgets will become one of the top three widget manufacturers in the UK, with a high level of customer and staff satisfaction. Turnover will rise to £2.5million, with a gross margin of 30%'. (If you don't have a full business plan, preparing such a strategic objective statement is the best way to start the process.)

2. Divide the objectives into tangibles and intangibles.

In terms of the strategic objectives statement above, the elements of staff and customer satisfaction are intangibles, while market position, turnover and gross margin are tangibles. These can now become your key indicators along with a number of standard ratios.

3. Work out how to measure your key indicators

Create a system for doing this at regular intervals - ideally once a quarter. For the tangibles, this is merely an extension of doing your accounts and can even be done automatically by using some standard ratios. For the intangibles, because by their very nature they can't actually be measured, you need a system of quantifying them, which you will find below.

Some of the things you might want to measure include:

Some tangibles, such as turnover or total sales, are easy to measure: you just identify a figure in your accounts. Others, such as profit per outlet, or even profit per square metre per outlet, are also easy enough to find once you've set up a system that allocates income and expenditure into cost and profit elements.

For others, you need to work out some simple ratios. Such ratios fall into three basic types:

Measure your ability to meet your expenses.

Measure how well you are doing. They also help you to plan change by highlighting the need for higher sales, bigger margins or lower costs.

Help you assess your stock levels, asset management, use of borrowing and all the other aspects of how you actually manage your business.

If you produce your accounts in an accounting package, some of these figures will be produced automatically. In other cases, you will use the figures in your profit & loss account and balance sheet and other reports as the basis for financial calculations.

Note that ratios in themselves can mean little. Their true value lies in comparing them over time and identifying trends. Another huge benefit is benchmarking, where you compare your key ratios with those of similar businesses. Healthy ratios for your type and size of organisation are developed from industry averages. You can then see where you are weak and need to focus, or strong and can exploit it.

Not all indicators can be neatly calculated, particularly intangibles. However, that does not mean they are less important to monitor.

What counts as an intangible? This varies from business to business, and includes such things as customer and staff satisfaction, professional standards, being at the leading edge of your industry, operating in a systematic way, and some other factors such as goodwill. You can't measure these things, but you can quantify them in the same way sports judges quantify a gymnastic performance - by awarding marks on a scale of 0 to 10.

Business plans and key indicators are not the whole reality. In the context of working out how your business is doing, this means you need to look at your key indicators regularly, and you need to understand that where intangibles are concerned, putting a performance figure on them doesn't necessarily make them tangible. It has just given you a way to assess them that is more meaningful than gut feeling. Finally, you need to be careful when extrapolating forward from past figures, and never relax your efforts.