Following our week of business performance management, we have been investigating multiple avenues that businesses’ need to improve to help their growth plans. In order to create a successful growth plan, businesses’ must establish what growth means to them, and create key performance indicators.
While most of the companies don’t agree on one form of business reporting, one thing is clear, the requirement to report financial and non-financial key performance indicators. UK companies must comply with the Business Review legislation, which sets out the standard for key performance indicators.
These, however, are not very clear or straightforward from Companies Act itself, so we are going to review the guidance on KPI reporting.
KPIs good practice
While all of the companies are different, it is important that performance indicators for your company should be those that the Board uses to manage the business and investment. Most of the time these are financial performance markers, even though they might be communicating strategies that depict customers or employees. The question is whether these KPIs allow the readers to assess the progress against the strategies of business growth and performance.
So, the metrics that you track and measure for your KPIs completely depend on your organisation’s goals and objectives. The choice of which ones are key is unique to each company it is therefore impossible to specify how many KPIs a company should have and what they should report on, but there are some basic rules to follow.
Set Your Strategy
Start with setting your target performance strategy first. Assess what are your business plans for the next 3-5 years. This can be either set in your business plan, growth strategy or you might need to create one. We discussed the basics of the business growth plan in our previous blog post here.
Set your lagging indicators. These are typically customer and financial targets, like sales targets and other growth indicators. You need to set them first and predict the potential that your business can achieve from a sales perspective.
Additionally, it is the best practice to set these targets based on the current potential of the company’s growth, rather than historical data. Using historical data to project the future without looking at the makeup of that data will likely produce very inaccurate results, or it will produce a report that does not account for market flexibility. We discussed more about sales forecasting pitfalls in our previous blog post, where you can find more information about setting sales targets.
Leading indicators are variables that you need to achieve the lagging indicators, this can be different processes, customer satisfaction, product improvements and so on. Once you understand the variables or processes that drive the potential and the future of the lagging indicators you will be able to set leading indicators.
The main reason for performance reporting is to allow the readers to assess the strategies adopted by the company and their potential to succeed. This is impossible if the two indicators are not connected. KPI’s have to have strong bonds with business targets and strategy, otherwise, you might be tracking and investing to measures that don’t attempt to promote growth.
Once you have a comprehensive set of targets for your strategic plan, you need to break those down into measurable indicators. Dividing your leading indicators per business department can make this task easier, allowing you to set targets for sales and marketing teams separately. These KPI’s can be anything from lead-to-sale conversion rate, to likes on your Facebook page, the most crucial part of defining KPIs is making sure that you can measure these targets and set achievable goals for annual and quarterly targets and then align them with your long-term business plan.
The most important thing about setting your target is to start with your long-term target first. Then you will be able to realise if your short-term target is realistic or not. Additionally, targets need to work as a group towards the main goal.
Furthermore, don’t forget that these KPIs and targets will be meaningless if you are not tracking or reporting on them on month by month basis. There are plenty of tools out there that can help you track your business performance progress, and you can find out more about what we do to help your corporate performance management