When designing KPI’s, the following three principles apply:
- The KPI moves the needle on a company’s financial statement metrics and financial ratios.
- The KPI is assigned to a team or individual within the company.
- The assigned team or individual has the authority to perform the task being measured by the KPI.
These three principles create what is called a performance feedback loop.
The assigned team or individual uses the KPI to monitor the company’s performance on whatever the KPI is measuring. The KPI measurement gives the team or individual the feedback they need to improve their performance. This improvement moves the needle on the company’s financial statements metrics and financial ratios.
The one universal KPI is the time it takes to produce monthly financial statements. Depending on the size of the company, this can be an individual KPI or a team KPI with individual KPI’s embedded.
Publishing financial statements on a timely basis is fundamental to moving the needle. The faster a company gets its financial statements, the faster they know how much the needle has moved. Furthermore, a company’s financial ratios are all derived from the financial statements. The faster a company sees an adverse change in its financial ratios, the faster it can improve the financial ratios.
Let’s say that we have a company with a high volume of transactions. They have teams to perform the payroll, billings, accounts payable, and cash management functions with a controller responsible for the production of the financial statements.
The KPI to produce a company’s financial statements is ten calendar days after a month-end. This KPI was decided based on the time after the month-end that it takes to complete transactions, gather data, process data, make entries into the accounts, run financial statements and analyse them before finalisation.
To meet the 10-day KPI, the company controller puts on their project management hat. They look at all the tasks that can be done concurrently. They then calculate what task in this group takes the longest time. They look at the tasks done in a sequence where the input for a task is the output from a preceding task. They calculate the length of time the sequenced tasks take. They look at the earliest possible start date for each task or set of tasks. They allocate the tasks to the teams and individuals. They populate the monthly financial statement schedule. The teams and individuals agree with the controller on the time it will take to complete their assigned tasks. These times become their KPIs. When all the team and individual KPIs are met (or improved upon), the financial statements are produced in ten calendar days or less.
Over time, the accounting department KPIs become standards. In this case, the KPIs are the maximum time thresholds to produce monthly financial statements. The controller’s project schedule can be carried over from month to month. They will adjust the schedule and KPI’s as required for changes in the volume of transactions.
At Rise Advisors, we serve owner-managed companies and draw on our 40 years of experience to design the KPI program that you need to achieve your Absolute Financial Performance. Call or email us at Rise Advisors to book a review of your KPI program.
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