Key Performance Indicators: Your Early Warning System

Dear Jayme:

When somebody asks me how my business is doing, I don’t always know the answer.  If I’ve just seen last month’s financials, I feel fairly confident in saying it’s doing okay but there’s a nagging feeling that I don’t really know.

Robert

Dear Robert:

Suppose you invested a big chunk of money in a classic car that was your life’s dream. (I’m talking about big money-like TV car auction money.) All your life you wanted this car, and you finally bought it and can go driving with the top down and the engine roaring.

Now, suppose you disconnected all the gauges, the warning lights and the speedometer. How comfortable would you be charging down the highway? What if you were losing oil pressure or the water pump was failing at 90 miles an hour?  You wouldn’t know until the engine seized up. How about if you were on the highway every day, but could only look under the hood once a month?

Monthly financial reports are critical, but they’re not day-to-day operating tools. Running a successful contracting business means keeping your finger on its pulse continuously. You can’t watch every detail every minute, but you can keep an eye on a few critical factors. If these Key Performance Indicators (KPIs) are within an acceptable range, you do nothing. If the warning lights come on, you know about it immediately and can take corrective action before serious damage occurs.

Identify the indicators: You use rules of thumb every day on the jobsite and KPIs are simply rules of thumb for the business.  Check with your trade association for operational indicators and your accountant for financial ones. Examples:

• Operational-Revenue per employee, callback percentage, on-time job completion/job status, service calls per truck, revenue per service call, etc.
• Financial-Quick ratio, days cash on hand, days receivables, etc.

Establish a standard and acceptable range for each indicator: For example, twenty-five service calls must be completed per truck per week, plus or minus five calls and 75 percent receivables maintained at sixty days or less.

Monitor: Assign an employee to generate the KPI reports every day or week. Establish a format, and post the reports where your people can see them. Make KPI results a primary focus of employee meetings. If an indicator is varying from the standard, you can immediately focus on the cause and correct it then, instead of having the problem masked until month’s end.

Watch lots of data and trends: Watch your KPIs on a graph to see performance over time. A single time period can fool you. If your booked sales are at the lower end of the acceptable range in one month, no big deal. If they’re at the lower end for three months in a row, that is a big deal, but you won’t see it unless all three months are displayed together.

Enroll the troops: KPIs and their standards define what’s important in your business, and your employees should be working to optimize them. Incorporate the indicators into your employees’ job descriptions and performance evaluations. If you define the indicators properly, what’s good for your business will be good for your employees.

Anything you treasure deserves ongoing vigilance and upkeep, and your business certainly qualifies. A solid KPI system tracks results every day of the month, and it’s those results that drive your monthly financials. Done right, you’ll have a pretty good idea of your monthly performance before the financials hit your desk.

Cheers!

Jayme

Jayme Broudy is the founder and principal of Contractor’s Business School®, a coaching, training and consulting firm specializing in helping contractors produce more profit in less time.  Since 1993, Broudy has worked with hundreds of contractors in many specialty areas to build successful stand-alone businesses. Visit www.contractorsbusinessschool.com/assessment or call 800.527.7545 for our FREE Business Analysis and learn how your business is faring during the recession.

Construction Business Owner, June 2009