Developing financial KPIs to monitor performance over time

A Key Performance Indicator (KPI) is a high level measure of performance. KPIs allow companies to monitor the impact of their strategic objectives and make smart business decisions about their future direction.

Companies generate a huge amount of data and it is important to work closely with each of your teams to understand what they need to help them commercially drive the business.

However, you need to measure the right information to ensure that you are focusing on those items that contribute towards strategic objectives and to drive the right behaviours across your business.

You should focus on the items that have the biggest impact and avoid confusing performance indicators with management information. Focus on what you can control the most, rather than items linked to legislation, regulation and market forces.

The following diagram provides a six-step overview of how to create and measure KPIs:

1. Understand your objectives

Start off by creating a robust strategy by understanding your objectives to work out what it is that you are trying to achieve. For example, by performing a SWOT analysis.

2. Select key drivers of performance

Select the key drivers of performance in the business and determine what influences your ability to deliver your objectives. You may wish to use cause and effect diagrams to illustrate this. You will end up with a long list of potential measurement points.

3. Evaluate potential measures

Apply good measures criteria to your list of measures to consider whether you can influence them and what impact they have. Reduce your list of measures down into a short list of key items.

4. Define detailed measurements

Create a definition for how you are going to measure each item. Consider a range of aspect including frequency, source of data and responsibility.

5. Develop measurement process and tools

Perform a systems assessment to consider which software tools you may wish to use. You will need to do this for each individual measurement item.

6. Develop management systems

Develop a management system to capture, report and cascade your KPI information. This should include setting targets, capturing real time information and determining actions.

Each of these steps are essential towards setting, capturing and reporting KPIs to your leadership team and wider business.

It is important to remember that communication is a two-way process. Your strategy drives objectives, which then cascade down into actions and results.

However, you need the right systems in place to capture and feed knowledge back to the leadership team. This allows you to monitor the appropriateness of your strategy and objectives, plus to check that you are delivering them as planned.

Summary

KPIs are an essential component of monitoring the effectiveness of your strategy and reporting business information back to your key decision-makers. As the business leader, you should work closely with your wider business to set, capture and report KPIs across the company.

Companies generate huge amounts of data and you need to focus on the key items that commercially drive the business. Your KPIs must encourage the appropriate behaviours that motivate everybody to deliver your strategic objectives.