How to choose the right metrics to support Your business?
Company's business can be measured by a variety of metrics. KPIs (Key Performance Indicators) show how well an organisation achieves the key goals defined for its business and is a great tool 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.
Strategy and goals as a starting point for metrics
It is important for the company to monitor the development of its own operations. Measurement is part of knowledge management that helps achieve better decision making in an organisation.
The starting point for measuring business is the strategy that guides all the organisation’s operations. Understanding organisation’s strategy and goals is a prerequisite for defining relevant and effective metrics. Often the problem is that the choice of metrics is not guided by the goals defined in the organisation’s strategy and the core business, so you easily 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 organisation’s life cycle, but the most important factor in the selection of metrics is their suitability for the goals set by the organisation. Organisation’s strategy and goals should be understood in order to select business-relevant metrics.
Organisations often end up monitoring metrics that are usually tracked in the industry, but may not meet organisation’s own needs or goals. When choosing metrics, it is important to think about how the set goals will be achieved.
Very often, organisations monitor traditional financial metrics (profitability, solvency and liquidity). They give a good picture of the financial situation of the organisation and are important, but it is still worth considering whether these are the right ways to measure business development.
Start defining metrics by answering to the following questions:
- What is our strategy?
- What things do we consider important for our business?
- What are our goals?
- What factors significantly contribute to the achievement of the goal?
- Who uses the meters?
There is no rule about how many meters is a good number. Just remember to use metrics that bring value to the organisation and which can be used to develop its own core business. Too many metrics can cause wrong business decisions.
How often should you measure?
How often something is measured, is significantly affected by the meter and the business of the organisation. For example, an e-commerce company may need to measure its turnover on a daily or even hourly basis, when measuring return on investment 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 time, 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 organisation is cash flow. Cash flow is used in all organisations and is not tied to company's industry or life cycle stage. The cash flow should be positive in the long run for a business to be called profitable. If the cash flow is negative, it will eat up the profitability. Positive cash flow enables the development of the organization, as it enables to make investments in product development or machinery and furniture, reduce its debts and possibly distribute dividends to its owners.
Measuring the achievement of goals
There is no benefit to measuring if the organisation does not react at all to the results obtained. It is a good idea for the organisation to draw up various action plans. 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. Building scenarios helps you anticipate different situations.
We can help You to build the metrics and reports that support Your business
We want to support the definition and monitoring of company metrics. Our BI service can be used to customize various financial metrics and reports that support business monitoring and development.
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