In last month’s newsletter we presented a formula to calculate the wealth requirement to maintain a desired lifestyle during retirement.
Next month we will pursue some of the investment strategies adopted by people to achieve that wealth.
This month we will discuss key performance indicators as a tool used to lift business performance.
In many businesses the extended lag between accounting data analysis and action is such that business managers get discouraged in terms of being able to remedy or improve situations. As an example, if a business collects and reviews its accounting information on a quarterly basis and sales are $100,000 per week, by the end of the quarter, sales would be $1.3 million. If the business has underperformed by 10%, the shortfall in sales is $130,000. This is greater than one week’s normal sales. Many business people on seeing such a large shortfall will be discouraged, as they consider the situation is hopeless. They feel that the lost sales will not be able to be recovered. The sheer quantum of the shortfall, even though it is only 10%, is a discouraging factor.
On the other hand, if sales are monitored weekly and one week falls 10% this will not be as discouraging. A sales shortfall of $10,000 will represent less than a day’s normal sales level, and accordingly, the manager and staff will not be discouraged to pick up that $10,000 worth of sales in the following week.
This example demonstrates the power of key performance indicators. Key performance indicators (KPIs) are measures, which are easily calculated, and calculated over a short period as simple derivatives from the information system of the business. Many businesses also find the communication of KPIs to employees creates an environment where the employees attempt to improve performance and meet targets. This environment quite often causes employees to act in a team-like manner where the employees eagerly await the publication of each week’s KPIs to set goals each week amongst themselves to drive the business forward.
Our firm has been involved in a suburban pharmacy where the KPIs are 1) the number of customers per week, 2) average sales per week per customer. When we commenced measuring these two KPIs, the number of customer transactions per week was 1,200 and the average sale was $6.64. Over the ensuring eight weeks the average number of customers did not alter, however the sales per customer slowly lifted to $6.80. I should point out at this time, that the gross profit margin in the pharmacy was approximately 40%. This meant that the 16c increase in average sale had increased the net profit of the business by $115.20 per week, just by lifting the average sale from $6.64 to $6.80. The more interesting issue is that by the end of the initial eight week period, the staff were eagerly awaiting the publication of the last week’s average sales figure and customer numbers and were assisting in the plotting of these numbers on a graph kept in the back office.
As the KPIs started to increase and with a few carefully planted seeds of inspiration by the business owner, the staff approached the business owner to find out what he thought they could do to lift the sales. An early start one morning a week was agreed so that instead of the staff arriving at 9 o’clock on a Wednesday they would arrive at 8 o’clock on a Wednesday. The staff would assemble, and over coffee and croissants provided by the business owner, he would discuss certain categories of product and provide product training. He also spent time discussing the issue of conjunction selling so that if a customer requested a burn cream the staff would offer not only the burn cream but also offer a bandage or dressing for use with the burn cream. These information mornings, held at the request of the staff, soon had the average sale increasing further. In fact, over the next six months, average sales per customer increased to $10.27. In that same time, the number of customers per week increased from 1,200 to 1,320. The addition of these two items increased the profit in the business by $2,235 per week.
Of course, the business owner rewarded the staff significantly so that it can be confidently said that his staff is the highest paid pharmacy staff in Sydney. The firm’s employees, as a whole, also enjoy some non-financial rewards as milestones were hit along the way, such as dinners and recreational pursuits to foster the team environment. The achievement of the KPIs acted as a catalyst to unite the staff members as a team and to define an easily understood goal that could be measured weekly. Rather than measuring profits over a 3 months period, goals and objectives are measured over a one-week period. Going back to our first proposition, it is much easier to reach and achieve goals that seem attainable.
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