A number of years ago, I was the account officer for a manufacturing company that was owned by one individual. The history of the company's performance was a bit rocky, and the owner wanted to improve that. During the "not so good" times, he recognized that he needed to be more focused on critical aspects of the company's operations, and he identified five or six components as "key performance metrics" that he could monitor that would provide him with the gauge to constantly measure his company's performance.
Each Monday, he examined a one page report, or "dashboard," which listed these key performance metrics as of the end of the prior week. The owner's accumulated knowledge of his business and the inter-workings of these key performance metrics provided him with the data that he considered to be vital to measure his company's performance.
During my initial meeting with this business owner, he handed me a copy of the current week's dashboard report, explained why these key metrics were crucial to the performance of his company, and explained how he would react if any of these key metrics indicated to him that trouble was brewing. The owner relied on this measurement tool to consistently monitor the company's performance and eventually attracted a buyer that paid him a significant amount of money for the positive value that was created in the process. Using this process, the owner was able to address the problems threatening his business.
What Are Your Key Performance Metrics?
Business owners and entrepreneurs "know their business," or they would not have taken the risk of forming or acquiring their companies. That is the basic assumption that I have used as a starting position when formulating an assessment of a company during my banking and business career. I discovered that each business type had quantifiable components that, when properly gauged and measured, could help determine the company's level of performance, either positive or negative. During the assessment phase I would rely on the owner to "teach" me the business, and I would always try to discover these key components that would help measure the success or failure of the company. These identifiable components are called "key performance metrics."
Most industries compile results of various performance components of a sampling of companies operating within that particular industry. These studies can be used as a baseline to compare one company's performance against the averages of like-sized companies operating within the same industry classification. Normally, the averages are illustrated in various tier levels that companies can use to measure their performance against their peers.
Key performance metrics can be customized to meet each company's needs and practices. They can also be departmentalized under various facets of each business concern, such as key financial metrics, key customer metrics, key strategic metrics, and so on. Key financial metrics would normally include certain financial ratios, such as the company's current leverage ratio, interest coverage ratio, and debt service coverage ratio. These are the basic ratios that a bank would normally calculate and analyze as part of its process of determining a borrower's risk rating, which in turn would influence the bank's ability to not only approve desired credit facilities, but also impact the pricing and other terms associated with an approved credit transaction. (This subject was covered in a previous Paradigm Management newsletter.)
The Paradigm Management team has helped numerous clients implement weekly dashboard reports to identify appropriate key performance metrics, develop the methodology to calculate each key metric, and measure and monitor each metric as a tool to assess the company's performance on a continuous basis. What we have found is that when the dashboard metrics are incorporated into the profit planning process, it becomes a dynamic tool that provides management with "real time" analytics that ensure they attain their profit goals
