Following on from the post about there being ‘profit in your future’ we thought that we should highlight how to know just how much profit there could be in your future.
People, well advisors and say you need to know your Key Performance Indicators to calculate this.
You need to understand them yes, but know them intimately, no.
- Will knowing that last month’s turnover is up 23% make you more profit and cash next month?
- Will knowing that last month’s Gross Profit make you more profit and cash next month?
- Will knowing that last month’s Net Profit make you more profit and cash next month?
The point is that knowing the past will only dictate the future. These measurements of performance are good but predictive measurements of performance are much better.
What is this all about?
Key Performance Indicators
“Performance” equals “past”.
Performance means output or result and tells you about what’s already happened, past tense, history. It’s happened so you can’t do anything about it
Key Predictive Indicators
“Predictive” equals “future”
Key Predictive indicators measure activity – the activity (input) that drives the outcomes (sales, leads generated, business growth). Key Predictive Indicators are input measures not output measures. They are leading indicators, not lagging indicators. Get inputs right and your business output, ie profit will follow.
As Orange said, the future is bright.
Think latterly here for a moment.
My car is full of Key Predictive indicators. If the orange engine management light illuminates I slow down and pull over. If the red low oil pressure light comes on, I slow down and stop. If the yellow run flat warning illuminates I slow down to less than 50mph and find a garage to test my tyre pressure.
These are Key Predictive indicators because they force action.
In business, this is simple to follow.
Instead of measuring turnover then look up the funnel further. How many customers do you have, at what average transaction volume and how many times to they buy from you each year.
If you know this then you will quickly know the effect of changing this input will impact your output.
If you get 10% more customers who buy from you 10% more often when you put up your prices by 10%, then your revenue isn’t increased by 30%…it goes up by 33%.
That is the power of compounding.
And that’s the power of Key Predictive indicators – knowing the outputs that will come from your inputs
Measure those three-simple metrics, number of customers, frequency of purchase and average spend, then incrementally look at ways of increasing each in turn.
Predict your future.
That’s kind of simple too;
• Pick Key Predictive Indicators that are performance related.
• Pick those Key Predictive Indicators that are available for ease and speed.
• Monitor your Key Predictive Indicators regularly and frequently for consistency.
• Ensure that people can understand your Key Predictive Indicators and that they are easy to comprehend.
Clearly there are financial indicators that we are all familiar with, and these are important.
Of equal importance are the non-financial indicators that relate to the effectiveness of the
business. These can range from very sophisticated error recording, to a simple salesperson visit rates.
Ensure that whatever your chosen indicators are they are measured consistently and regularly. It would be a futile exercise measuring results if you keep adjusting or changing the criteria.
This also relates to timing. If you monitor monthly, ensure it is truly the month’s results; not one day early nor one day late.
Make sure that they are available when they have relevance.
There is no point if it is too late to take corrective action. Remember that the selected indicators are meant to help you make decisions about running your business, not to cause frustration.