How to choose the right metrics to support Your business?
Business of the company can be measured by a variety of metrics. KPIs (Key Performance Indicators) show how well an organization can achieve the key goals defined for its business. KPIs are a great tool when you want to track business progress. Effective business indicators can be used to monitor matters relevant to the business and to promote the achievement of goals in accordance with the strategy.
In this blog post, we review the metrics that describe the activities of organizations, the measurement frequency and how obtained measurement results can be utilized for business development.
Strategy and goals as a starting point for metrics
It is important for the company to monitor the development of its own operations. When operations expand, it is necessary to introduce metrics that can be used to monitor and support the development of the company’s operations. Measurement is part of knowledge management that helps achieve better decision making in an organization.
The starting point for measuring business is the strategy that guides the organization’s operations. Understanding organization’s strategy and goals is a prerequisite for defining and selecting relevant and effective metrics. The selected set of metrics tells you which things in the organization are considered important. Often the problem is that the choice of metrics is not guided by the goals defined in the organization’s strategy and the core business, making it easy to measure the wrong things.
How to choose the right metrics for your business?
The choice of metrics is influenced by your industry and the stage of the organization’s life cycle, but the most important factor in the selection of metrics is their suitability for the goals set by the organization. The definition and selection of metrics should be derived from the organization’s strategy and goals, and therefore these should be understood before business-relevant metrics can be selected.
Organizations often end up generally monitoring metrics that are tracked in their industry but may not meet each organization’s own needs or goals. When choosing indicators, you need to consider how the set goals will be achieved and who will be involved in achieving the goal.
Very often, organizations monitor traditional financial metrics (profitability, solvency and liquidity), which give a good picture of the financial situation of the organization. Monitoring profitability, solvency and liquidity is important from a financial point of view, but it is still worth considering whether these are the right ways for your organization to measure business development. Does monitoring these metrics meet the goals set by the organization?
You can start defining metrics by thinking about the answers to the following questions:
- What is our strategy?
- What things do we consider important?
- What are our goals?
- What factors significantly contribute to the achievement of the goal?
- Who uses the meters?
Answering these questions will reveal the areas that are important for determining the metrics.
What is the right number of gauges?
There is no rule of thumb as to how many metrics are good to take advantage of. The starting point is that the organization uses metrics, the monitoring of which brings concrete added value to the organization, and by monitoring them, one can develop one’s own core business. An excessive number of metrics can confuse an organization’s management and also cause wrong business decisions.
Measurement frequency – How often should you measure?
The measurement frequency, i.e. how often something is measured, is significantly affected by the meter being monitored and the business of the organization. For example, a company engaged in e-commerce may need to measure its turnover on a daily or even hourly basis as it supports e.g. targeting advertising. On the other hand, when measuring return on investment, for example, measuring on a daily or weekly basis does not necessarily bring added value, but measuring monthly is sufficient.
Employee satisfaction can be measured, for example, on a quarterly basis at a specific time, in which case monitoring can be compared to the same time in the previous year. For example, in the spring, employee satisfaction can be expected to be higher when there is a holiday period ahead, while in November, satisfaction can be lower. The measurement frequency should therefore be such that a comparison of the result between gives a true and reliable picture of the use of the meter and the results.
A continuous target for measurement in an organization could be, for example, cash flow. Cash flow is a so-called universal measure that works for all organizations and is not tied to companys industry or life cycle stage. The cash flow of an organization should be positive in the long run for a business to be called profitable. If the cash flow is negative in the long run, this will eat up the profitability of the organization and may end up in bankruptcy. Positive cash flow enables the development of the organization, as it enables the organization to make investments in product development or machinery and furniture, reduce its debts and possibly distribute dividends to its owners.
Measuring the achievement of objectives
There is no concrete benefit to measuring if the organization does not react at all to the results obtained. It is a good idea for the organization to draw up various action plans that can be relied upon when reviewing the results provided by the indicators. It is not appropriate to give too much weight to the individual variation in the results of the meters, but to define certain limit values that guide our action on the basis of the result given by the meter. The limit values set for the meter are significantly affected by the meter being monitored.
Building scenarios helps you anticipate different situations and planning reduces stress of the management, especially when gauge results appear negative.
Lassi Ylisiurunen | Financial Advisor
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We can help You to build the metrics and reports that support Your business
The starting point for utilizing the metrics is the maintenance of the basics. Once the accounting processes are right, a business metrics can be built for the organization that can be utilized for business development.
For our part, we want to support the definition and monitoring of company metrics. Our reporting service can be used to customize various financial metrics and reports that support business monitoring and development.
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