Let’s say you’re planning a road trip. You know where you want to go, and you even know how you’re going to drive the route. You’ve circled your stops for gas and food. Once you leave, you’ll even count down the hours until you arrive – and maybe shout the lyrics to “Life Is a Highway” when no one’s looking. Across almost every industry, smart leaders understand businesses face the same type of journey (and requirements). They build a strategic financial roadmap – where point A is “today” and point B is some time or place in the future with a lot more money. But to get to Point B, you need to ensure you’re making progress by building a balanced scorecard and using SMARTER KPIs. Otherwise, you’ll be spinning your wheels and churning through valuable resources.
That’s why it’s important to follow (maybe) the #1 rule of the road:
Set your objective. Then, measure your performance against it.
Progress is that simple. But that simplicity can mean measurement is often overlooked.
One popular method of measuring progress is called “balanced scorecard strategy.” In essence, this strategy starts by identifying critical key performance indicators (KPIs) within the company. It was the brainchild of Robert Kaplan and David Norton in the 1990s, when businesses mostly focused on financial performance. Kaplan and Norton keenly realized that this approach only measures results after they’ve occurred.
So, how do you get ahead of the results? How can you promote agility and real-time business decision making? That’s the beauty of measuring KPIs. You can do it daily, weekly or monthly. Utilizing the balanced scorecard strategy ensures you’re keeping track during your journey.
Here are the three steps you need to take when creating your balanced scorecard:
#1: Choose KPIs That Are SMARTER
What does SMART mean? It’s an acronym for:
- Specific
- Measurable
- Attainable
- Relevant
- Time-bound
And that’s a great start. But nowadays, it pays to be SMARTER, meaning SMART, plus:
- Explainable and
- Relative
“Explainable” means that any one of your business associates can understand the reason for the KPI. “Relative” means ensuring that the metric can continue to be measured as volume grows (e.g., using percentages rather than whole numbers for goals).
Using SMARTER KPIs also helps avoid KPI overload. With the astounding (even overwhelming) amount of data we have access to these days, it’s more important than ever to ensure you can focus on the “R.” Begin with between five and 10 relative KPIs on your balanced scorecard – both leading and lagging indicators.
For example, let’s say you’re a sales and distribution company. Here’s one example of how a balanced scorecard could look:
#2: Establish Your KPI Process
Many organizations have various departments keeping track of their individual KPIs. In the example above, Finance is responsible for financials, Operations for operations, Marketing for customers and Human Resources for employees. With everyone focusing on their work, it’s critical you establish a point of contact to consolidate and curate data. Typically, it’s a Finance role (e.g., a financial analyst) because they tend to be in charge of confidential information and are objective.
You also have to decide on the time periods you want to measure. Some KPIs can be measured daily (e.g., fulfillment), while others are better served on a monthly period (e.g., EBITDA). Choose the reporting structure that makes the most sense for each of the KPIs and create a single dashboard for the financial analyst to distribute on a regular basis.
Important note: Evolve your KPIs on a regular basis. Keeping a critical eye on the measurements allows you to make more responsive, agile decisions. Establishing a cadence as to when you will review and adjust your KPIs provides a sound structure while allowing the business the time it needs to achieve goals.
#3: Create a KPI Driven Culture
Now that you have chosen the right KPIs for your business at a high level, and have set up the process for the executive team reporting, it’s essential to institute a KPI mindset throughout your organization.
Setting a culture and identity always starts at the top. You need to have executive level buy-in to your KPI management system. That way, they can evangelize and socialize with their teams. Creating buy-in also means holding them accountable to their KPIs. These support the high level, executive dashboards. Everyone should understand that KPIs are key to success and used in determining performance reviews. And don’t forget to have the right technology in place to help capture your KPIs.
A Final FYI on your KPIs
You’re trying to manage your business in a data rich, data-driven environment. Using SMARTER KPIs throughout the organization allows you to reach the goals of your business. But there’s no reason to go it alone, especially when 8020 can help. If you’d like to learn about measurement and making progress to objectives, we offer a free operational review process guide.
If you’re looking for support in KPI setup and monitoring, we offer services related to finance and accounting optimization. Learn more by clicking the button below:
