Drivers of Key Performance Indicators

Make good use of your understanding of Key Performance Indicator by what knowing the drivers are for those KPIs.

Drivers, the Breakfast of Champions
Understanding which Key Performance Indicators are important in your business is a good start.  To make good use of your new understanding of KPI's you must know what the drivers are for those KPI's.  To improve your business, you must not only measure what your key performance indicators are, you must also know actions will improve those key performance indicators. 

For example, if we have inventory turns as a key performance indicator, it's important to know how often it takes us to sell the inventory we have on hand.  If it takes us four months to sell our inventory and we have $500,000 of inventory on hand we will cycle through this inventory four times per year.

If we believe that we can improve our inventory turns from four times per year to eight times per year, we'll end up creating $250,000 of cash.  This can be found money, but first we need to understand what specific actions in our company cause us to have $500,000 in inventory.  Are there things we can measure or do that will help us increase how fast we turn our inventory?  Or, to put it another way, are there things we can do to decrease the amount of inventory we need to keep on hand?

The actions or things that we can do to improve our inventory turns is called drivers.  KPI's in and of themselves won't do much to improve our business.  Understanding and taking actions to improve the drivers in our business will result in improving KPI numbers which makes our businesses better.

Information provided by Josh Patrick, CFP, CLU, ChFC, is principal of Stage 2 Planning Partners, South Burlington, Vt., and specializes in working with closely held business owners on a variety of concentrated issues that are unique to owners of private firms. He can be reached at 877-880-5112; email: [email protected];

Additional resources that build on the topics of this article
Read an overview on key performance indicators - the two or three numbers from your financial report analysis that spell the difference between the success and failure of your construction business.