How to set and monitor financial KPI’s for impact, to the right audience and to achieve your goals ?
This article answers the questions of what is a KPI, why to use them and how to balance them with your audience goals and targets.
What is a KPI or Key Performance Indicator?
Simply enough, it’s an acronym for a measurement of progress of particular importance to one’s success. You could happily substitute metric, target, measure, impact to broadly similar effect.
Why using them ?
Setting KPIs helps define success and monitoring them enables an organisation to adapt its actions and behaviors on the way to that success. Despite some bad press, if used effectively, KPIs are a vital and welcome tool, enabling organisations to make their aspirations and rhetoric a reality, not just once, but reliably into the future.
How to put them in place?
1. Gather the decision-makers to agree the process 👨🏭
KPIs are a management tool which much be owned by the whole management. Senior managers need to agree the process for setting monitoring, reacting to, and reviewing measurement. They also need to agree what resources are available.
Note: one of the commonest failures of performance management in the corporate world is failing to acknowledge the staff time required.
2. Turn your mission into audience objectives 🎯
How does your vision/mission and strategic aims relate to your audience? This may already be explicit, but if not, you need to think through how these might relate to your audience objectives. These also form the basis of an audience reporting plan, but also the goals from which indicators can be developed from. There may be different goals for different types of audience.
Treasurers strategic objectives to the CFO are to:
- Gain visibility on cash actuals and forecasted positions
- Reduce the cost of capital
- Maintain the financial result at x% of the operating profit
It’s department objectives are then to:
- Deploy all the entities of the group with an accurate system
- Centralize X% of the group cash to reduce external financing need
- Reduce the number of bank accounts by 40% in the next 2 quarters
3. Set KPIs for each objective 🏹
Ask yourselves what success will look like or how will we know when we get there? What is the best indicator for that success? What level of detail will be the most useful?
Note: some experts suggest that KPIs that focus on what you DO, not the results themselves are more effective. (ex: number of deals handled by the Traders of your organization, number of transactions managed by your In-House Bank Treasurers).
4. Define a relevant timescale⌚
How long will it take you achieve goals and what are the indicators along the way? Audience KPIs will look very different for long-term organisational goals, by season, or one-off project aims. Decide what period you are monitoring and how often data will be collected.
Note: KPI gurus say that frequently and regularly monitored KPIs (daily, weekly, monthly) are the most effective.
5. Contexts 🎧
Compared to what? To add real meaning to progress it is useful to be able to compare results on other measures. With your own performance (trends over time), with benchmarks, or with general insight about audiences, or the population.
6. Data-collection and analysis 📊
Once a set of indicators is drafted, you need to consider how the relevant data for measurement will be collected. The resources this takes — such as staff time, outsourcing, IT etc. need to be proportionate to the gain you anticipate. Access to data is today one of the most challenging topic of organization.
Note: it can be a false economy to add these duties to overloaded staff without the relevant skills, especially in research design or analytics.
7. Process for communicating and decision making 📲
Obviously the larger the organisation, the more filtered communication of KPIs needs to be. Ensuring a good match between KPIs and staff who have an interest in them is essential to getting buy-in. On the other hand, non-decision-making staff, like back-office operators, can find KPIs very motivating. Communicating results in compelling but finding out the most relevant ways is also crucial.
Note: Data-visualization technologies have revolutionized the use of KPIs because they have made information so much more readily accessible. You can build your own in Excel for a start but don’t let the tail wag the dog — make sure it shows the info and the support you NEED. Nowadays, you will build more power and value with a nice, simple and easily accessible mobile financial reporting application.
8. Taking action and reviewing
Ultimately this is the “acid test” of KPIs. Regular monitoring must lead to planned action in response to positive or negative variation. Nominating people with the responsibility to take action in advance is strongly advised.
Note : Don’t forget to review the KPIs themselves, adding new ones for specific projects, and stripping out what’s not working.
Once you have a draft of potential KPIs, check to see if they pass this test:
- Clear: is it clear what you are measuring and why?
- Crucial: are your KPIs of organisational importance and likely to affect crucial decisions and actions?
- Collect-able: can you actually get the data you need for measurement with a reasonable level of resource?
- Consistent: will you be able to track this KPI over time consistently to assess progress?
- Contextualized: will you be able to compare results, with other relevant organisations, with the population? Can you access this information?
- Communicable: are they easy to represent and understand — both metrics and their implications? Will your KPIs motivate or irritate relevant colleagues?
- Channeled: who will be responsible for taking action to address?
9. Less is more 🍀
The number and complexity of financial KPIs that can be employed are relative to the size and capacity of the organisation. As a rule of thumb, though, less is more. There’s so much information a department or organisation can maintain its focus on, that’s why getting to the crux is so important.
10. You don’t have to get it right first time 🤔
Experts suggest that it can take a long time to settle on a handful of meaningful KPIs so do experiment and drop things that aren’t working — though be sure to give them long enough to find out. To achieve that continuous improvement, make sure your are technically armed with staff or external partners that can help you making your financial reporting activity flexible and AGILE !
Don’t forget, it’s not (all) about the money💰
Performance management was developed by commercial business with the simple, ultimate goal of generating financial profit but today organisations are trying to balance a more complex set of objectives. However, like many other processes, we can usefully adapt it to meet our needs. Think then about a balance sheet for your organisation with 3 different areas of accountability:
- Financial: profitability (turnover, margins…), sustainability (cash & working capital) which enable development
- Social: serving specified group of people… on the planet which enable us to continue leaving our lives peacefully
- Cultural: achievements in creating particular kinds of quality experiences for your staff and for your customers which enable a strong feeling of affiliation to why your organization is doing things this way.
How would you describe the triple bottom line your organisation?
At CashStory, we build financial reporting applications that will speak to each of your audience : investors, boards, treasures, controllers…
We transform any complex financial data in a nice, simple & secure mobile application, in no time.