KPI’s - What Are They All About?
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The world is awash with acronym’s and the financial sector is no exception with GST, IRD, ACC, PAYE, FBT, EBIT, EBITDA, NPBT, NPAT, EBITDAC, UOMI, FOREX, CAPEX, OPEX, EPS, NTA, NPV, ROA, PE, MTD, YTD…the list goes on and on but my favorite one is KPI’s……
Key Performance Indicators - KPI’s
KPI’s are the critical (key) indicators of progress toward an intended result. They help people focus on strategic and operational improvement and create an analytical basis for decision making. Probably their most important role is that they help focus attention on what matters most. As Peter Drucker famously said, “what gets measured, gets done.”
The key things in designing KPI’s is to make sure that:
You know what you are trying to measure
Select the ones that are simple to understand
Determine who they are for and that they are relevant to the user - will they use them?
Do they align with the business or individuals strategy?
Will they result in improvement?
They must be reviewed over time and not taken in isolation
No single KPI can explain a situation happened - you may need several
There are financial and non financial indicators
Therefore, the main focus must be to have simple, precise and relevant KPI’s.
My favourite ones?
Capital Gearing or Equity Ratio
Equity divided by Total Assets
Assets = Liabilities plus Equity (A = L + E)
Grow assets with a combination of liabilities and equity - not just one
Tells you what you own versus what you owe
Don’t overvalue assets - be consistent
This can be done for individuals - what is my net worth?
James