It has been a long time since I attended graduate school on a National Science Foundation Fellowship in mathematical statistics. But I can still remember how amazed I was that I managed to survive a Ph.D. math program. While I was not the sharpest knife in the academic drawer, I always liked mathematics and found it fit my natural abilities. I was always somewhat surprised how so many people resisted either taking mathematics or putting forth much effort in their mathematics courses. It has always been clear to me that mathematics is central to life, especially when it comes to running a healthy business. I once heard a speaker say, “All Business Is Math,” and I stopped and thought for a minute that this person was right.
Key performance indicators (KPIs) in business rely heavily upon numbers and mathematical logic. KPIs are some of the best performance measurement tools used to make intelligent business decisions. Keeping up with KPIs is an important aspect of evaluating a business in real-time. These metrics help management determine business performance relative to specific goals and objectives. KPIs provide a picture of performance and whether or not a company is achieving its goals. Some of these metrics are specific to a given industry, while many principles are generic and apply to most businesses. This article is a basic primer on KPI, including a little basic math. Even for those who hate math, this primer will help you get more out of your business data.
A business manager wants to be sure that KPIs fall in line with the business’s goals. They should be measurable and actionable, and they should include a reasonable time frame. KPIs should be as specific as possible. For example, a goal to be the best company is not very specific, nor is it measurable.
An industry specific KPI might include something like production per pallet manufacturer or per pallet repairer or recycler. There is some freedom in crafting KPIs, but there are several criteria they probably should meet. They should be actionable – they should show the actions that you need to help your business. They should measure accurately, be easy to calculate and interpret. KPIs should be timely. Old data can be useful as a comparison tool for current information. Lastly, these key metrics should impact the bottom line and result in progress toward your goals.
The following is a list of KPIs that you might want to consider. You cannot do them all and do them all well. But you should pick two to three to focus on for a specified amount of time. Consider some of these general KPIs: cash flow forecast, gross profit as a percent of sales, revenue growth rate, inventory turnover, accounts receivables/aging reports, customer acquisition cost, employee engagement score and customer loyalty.
A really good article on KPIs on Klipfolio suggested the SMARTER system to evaluate KPIs (https://www.klipfolio.com/resources/articles/what-is-a-key-performance-indicator). SMARTER stands for Specific, Measurable, Attainable, Relevant, Time-bound, Evaluate and Relevance. You should ask these questions:
• Is your objective Specific?
• Can you Measure progress toward that goal?
• Is the goal realistically Attainable?
• How Relevant is the goal to your organization?
• What is the Time-frame for achieving this goal?
• How useful was this KPI in Evaluating your progress?
• What happens to the Relevance of this KPI over time? Is there adequate follow through and communication?
KPIs are not magic. Many metric efforts fail because of a lack follow through. The everyday cares of the business drown out KPI focus.
Let’s look at two key KPIs in detail.
Sales Revenue
Certainly, sales revenue results provide information on whether or not people are interested in buying your products or services, as well as how effective your marketing efforts have been. Increasing your sales can be accomplished by expanding your marketing efforts, developing new products or services, raising prices, hiring new sales people or making discount offers to grab more market share. Growing sales revenue should be a long-term strategy, not a quick or short-term boost just to meet an arbitrary sales target.
Sales Revenue = Total sales income
across all product and service categories
Are you leaving sales on the table? Is there more business you can do from existing customers if you focus more on sales outreach? What if you begin offering more pallet sizes or services? Your company should conduct a sales analysis at least once a year to figure out how best to take advantage of sales opportunities.
Gross Margin
Gross margin is particularly relevant for beginning companies because it reflects on process and production improvements. Gross margin is your total sales revenue minus your cost of goods sold, divided by your total sales revenue. Gross margins can be improved by making both your sales and production processes more efficient. This fits well into the equation:
Gross Margin = (total sales revenue – cost of goods sold) / total sales revenue
Increasingly, pallet and lumber companies are focusing on efficiency and cutting production costs as employees and business expenses keep getting more expensive. One of the best sources of ideas to improve production processes is the worker on your line. Do you have one or two pallet builders who outperform everyone else? Sure, this extra production may just result from plain effort. Or maybe the builder has optimized his workspace to reduce wasted motion?
So, which KPIs do you need to start monitoring and championing in your organization. Take some time as 2019 winds down to consider what key metrics you need to focus on throughout 2020. This may be a great discussion topic for an owners, managers and key supervisors meeting. Bring in lunch and let the conversation flow. Business math doesn’t have to be scary, but it is necessary if you want to survive in the pallet world.
