The performance of a business depends on the quality of decisions that are made. These, in turn, depend on the quality of information available to the people who make the decisions.
An accounting system generally only provides information that arises from financial transactions. In essence, it summarises the financial consequences of the variety of processes that are involved in doing business.
It is an excellent system for monitoring how well or how poorly a business is performing in the aggregate. However, because it focuses on the outcome, rather than the process, it does not provide information in sufficient enough detail to monitor the performance of the activities critical to the success of the business.
The critical success factors of every business are ultimately determined by its strategy—that is, by the way in which management decides to compete. It is worth noting in this extent that unless the firm’s strategy is based on being the lowest cost producer, it is unlikely that cost would be very high on the list of critical success factors. Despite this, the vast majority of people in business see the road to success as being cost control and therefore, their management information system focuses on aggregated cost and revenue reporting.
Clearly, costs are important, but they should not be the primary point of focus. What is important is a thorough understanding of customers’ needs and wants and from this, a clear understanding of what the business must do to meet those needs. By far and away, the biggest problem facing most businesses today is their failure to understand this point.
For a business to identify its CSFs, all that needs to be done is to look at the various dimensions of quality and determine specifically what it needs to do to meet those dimensions in the eyes of its customers. Having done that, measures of actual performance must be selected that will reveal how the business is doing. These are the Key Performance Indicators.
A Key Performance Indicator is a financial or non-financial measure of activity, which indicates on its own or in association with another measure, how a business or process within a business is performing. KPI measures take the form of time, size, dollars, numbers, percentages and so on.
For example, net profit is a KPI that stands on its own. It is a CSF for the survival of a business. Return on investment is another KPI. The solvency of a business depends in part on its credit policy. Therefore, a CSF is a strong credit control program. This can be measured by receivables turnover and, therefore, receivables turnover is a KPI.
There are also a number of non-financial measures of performance and/or productivity that are critically important. For example, the number of sales transactions generated from marketing efforts, the number of sales made as compared to the customers that have made enquiries for your products or services. Customer satisfaction levels may be another relevant KPI for your business.
The point is this – if you don’t know what it is that is critical to the success of your business and have KPI’s wrapped around those success factors, then it is time that you did.