Business Performance & Financial Management Series #6
“The 3 M’s to Increased Performance?”
If you are an even close to avid reader of business magazines and articles you can rest assured that you have heard the term “Key Performance Indicators” or KPI’s. And as a business owner or manager you will have a pretty good idea of what your KPI’s are.
One of the difficulties with KPI’s is first of all determining the correct things to measure. Unfortunately, after identifying the correct KPI the regular follow through of continuously measuring starts to fade, and what was once reviewed on a monthly basis becomes quarterly and then twice a year , and maybe eventually annually. But let’s say you do review your KPI’s on a regular basis – fantastic – are they still relevant? KPI’s can change. Maybe reviewing inventory turnover on parts under $120 is no longer pertinent as they no longer represent a significant percentage of inventory, whereas time to manufacture 16’ trailer assemblies is critical as they represent the key component in your product line.
Regardless however on what item or area you have identified to review, how do changes in these areas affect the performance of your business? I would suggest that if they are “key” then variations will have positive or negative consequences to you financial stability. And if they do not, then you have chosen the wrong area as a KPI.
My suggestion to you is that for any item or area you identify as a KPI you should be able to perform the following 3 M’s to: Measure; Modify and Monitor.
You must be able to measure in some way your KPI, either in a monetary or physical sense to ensure that you can identify changes. And you must pick the most relevant measurement tool. For example measuring production hours lost to inventory shortages might be a better KPI then measuring inventory fill rates.
You must be able to modify your KPI. By this I mean that you should be able to modify the inputs either intentionally (changing material suppliers to ensure better inventory levels of product) or unintentionally (effect of lost production due to sick time). The desire is to be able to see the effect of modifications to a KPI and how changes will affect your financial position.
And finally you need to monitor. Once you have chosen the items to review, you need to have policies and procedures in place to regularly monitor the KPI. And from this information you need to address what the information is saying. Hold a review with key personnel and discuss your findings.
Remember, everything affects the financial position of your business. Better inventory turnover provides better production flow, which leads to meeting production deadlines without overtime allowing for production to meet target costing and better margin control. Which should lead to better profitability and increased cash flows.
Jim Melville, CPA, CA