How to track business KPIs

A KPI is a measure chosen because it tells you something important about how the business is going, checked at regular intervals. business.gov.au's advice on goals says a measurable target lets you see progress and know when you have arrived, and that the measure can be money, customer numbers or customer feedback gathered through surveys.

Some KPIs show results after the event, such as monthly profit. Others give early warning, such as the total of overdue customer invoices, which often moves before cash runs short. A useful set has some of each.

Start from your goals for the year and from the risks you most want to see coming. business.gov.au's warning signs of financial trouble are a good source of early-warning measures:

• customers often paying late, which an overdue invoices KPI picks up
• low profit margins, which gross profit per dollar of sales picks up
• a decrease in sales or the loss of major customers, which sales against forecast picks up
• more complaints or refund requests, which a simple count picks up
• losing staff often, which a count of people leaving picks up.

Leave out any measure you wouldn't act on. If a KPI could double and you would do nothing differently, it belongs in an occasional report, not on the list.

Two people working out the same KPI should get the same answer. A short definition sheet makes that possible.

Add a target for each, taken from your own goals and budget, and the name of the person who updates it. business.gov.au suggests asking, for each goal, where you can get the information you need to measure progress. The definition sheet is the answer written down.

KPIs are only as reliable as the books behind them. Before each update:

1. Enter all sales, bills and payments up to the cut-off date.
2. Reconcile the bank and card accounts to the same date.
3. Run each report for exactly the period in the definition.
4. Copy the figures into the KPI sheet without adjusting them, and note anything unusual beside the figure instead.

Use the same cut-off every time, such as close of business on the last Friday or the last day of the month. A KPI taken a few days late in one month and early in the next will move for reasons that have nothing to do with the business.

Sales are ahead of forecast across the quarter and gross margin is on target. Those measures look sound, but they do not establish that net profit is on target because other expenses also affect it. The other lines raise questions: overdue invoices have grown each month and cash has fallen below its target, which points to collections. Refunds have jumped, and business.gov.au suggests that when customer behaviour changes, such as more complaints or refund requests, you ask customers for feedback.

• Look for direction over several periods before reacting. One poor month can be timing.
• Compare like periods. A seasonal business should set each month beside the same month last year as well as the month before.
• Read the KPIs together. A rise in sales alongside a rise in overdue invoices tells a different story from either alone.
• When a KPI misses its target, trace it back to the report it came from and find the transactions that moved it.

business.gov.au suggests setting time aside to review how you are tracking towards your goals and to think about what you can do when you are off track. Every so often, review the KPIs as well: drop any that never lead to a decision, add any that would have warned you of a problem you didn't see coming, and reset targets when your goals change. When you change a definition, note the date, so later readers know where the trend line breaks.