Closely monitoring Key Performance Indicators (KPIs) is an important part of financial management in corporate settings, but we’re often asked: What role do KPI’s play in small to medium enterprises? 

• For a small business (e.g. a tradesman) it may be as easy as working out how many hours are billed to clients each day or week. This will give an early indication of profitability.
   
• For businesses with more complex product and service offerings or input costs (e.g. manufacturers, wholesalers, medical clinics, or travel agents) drilling down into profit and loss drivers quickly becomes critical to diagnosing problems and improving the business bottom line.

In most businesses, measuring ‘activity’ metrics shows where there is a problem or an untapped opportunity. Activity based cost reports are useful because when a business owner understands the costs involved with delivering products or services and how these differ across divisions or service types, it becomes a powerful tool for managing and improving financial performance.

To understand why a business isn't hitting profit targets questions need to be asked:

• Is it a price issue? Are you discounting too much too often?
• Is the price holding up but volume has fallen?
• Is one star department or service profitable but others are letting you down?
• How long does it take to get your product or service out the door?
• Are there too many man-hours required or do you have poor efficiency in key areas due to a lack of technology or skills gaps in your team?

The specific metrics needed are different for every business or industry, but these are the broad areas worth developing measurement metrics around. When you can say “this month we didn’t meet our profit targets because we had 100 man-hours available and we only used 50 of them to produce income” then you have a clear problem you can fix. 

If this isn’t the way your company thinks about financial reports today it could well be worth making the change. We work alongside many clients to establish meaningful KPIs. For more information on setting KPIs or to discuss how KPIs and activity based reporting could help your business become more profitable contact our team today.