Guest post by James Bright, details below.
How KPIs and Happy Meals fit together
Business Drivers or Key Performance Indicators (KPIs) are critical information to running successful businesses. They are used by all levels of management in large business to monitor and identify trends in the business and make ongoing adjustments. But understanding KPIs and using them to manage your business is just as important in small business as it is in large organisations.
Typically, KPIs consist of both financial and non-financial numbers.
The key to establishing them in any business however, lies in intimately understanding the business and narrowing down to the critical indicators of the health of your business. The indicators that really tell you what’s going on and how the business is tracking against its strategies.
A course I did recently outlined McDonalds Australia’s business drivers and what their CFO tracked to get an overview of the business. The KPI “dashboard” contained approximately 25 business drivers such as:
- Gross Margin
- Staff Turnover %
- Total Sales per Store
- Customer Satisfaction
One number to rule them all
All pretty dry and unexceptional numbers, but one stood out. Amongst the list of classical accountancy numbers was a single, surprising and simple KPI that summarised the overall health of the business.
So what was this magical KPI?
The number of Happy Meals sold that week….
When you consider this, it makes perfect sense. If Happy Meals are selling well it means many other things must also be true:
- Advertising is obviously working as the kids are pestering their parents to go to McDonalds.
- If Happy Meals are being sold you can bet that other products were sold on that same order as the parents or older children ordered something as well. This means higher top line sales, and higher $ value per total order. All impacting positively on Gross Margins.
- Customer satisfaction is obviously positive as what kid doesn’t love a Happy Meal, and what parent doesn’t enjoy 15 minutes of peace and quiet?
It was an interesting lesson, most specifically because many small and medium businesses use financial data such as gross sales or profit to review performance and look for trends. Perhaps there are non-financial KPI’s that you can use to get a deeper insight in your business. Maybe you can identify your own “Happy Meal” KPI.
Get under the bonnet
The biggest opportunity in the development of your small business is to work out what the critical KPIs for your business are. Finding your KPI’s starts by conducting an objective review of your business from the outside looking in. It forces you to really get under the bonnet.
Ask yourself questions, such as:
- Why do my customers buy my product or service?
- Do they generally come back?
- Do they recommend me or my product to their own networks?
- What is my sales pipeline and how does it connect to my delivery and ongoing service or support pipeline?
- If I am making products what are the elements in this process that set me apart from the competition?
- Are my employees satisfied and is that being conveyed to my customers?
Ultimately conducting this analysis of your business would yield a few critical business drivers that are aligned with your strategy. These can be used to establish the same insights as the largest businesses that will allow you to monitor and review the trends and make the necessary adjustments to ensure your ongoing success.
What’s also important to consider is your ability to obtain and synthesise data from your systems, ultimately turning it into information for decision-making.
Do you know what your business critical KPI’s are and are you tracking them in a consistent manner in order to gain the right insight into your business?
This article was written by James Bright of Brightandco Pty Ltd Virtual CFOs and Accountants in Sydney.
James and his partner Alex are accountants and financial management experts and are passionate about helping small business owners take control of their business, by getting under the bonnet.
Virtual CFOs and Accountants