The CFO’s guide to managing key performance indicators

IRIS Enterprise Software Australia consultant, Rupert Ralston, has extensive financial management software experience in the SME space. Working with organisations throughout Australia Ralston encourages efficient business practices through more intelligent and automated systems. In this guest article, he examines Business Intelligence and how ‘KPI’s’ can be used to your competitive advantage.

Too many Australian businesses are being caught up in the nonsense and over-complexity surrounding ‘KPI’ analysis, reporting and measurement. When businesses grow and management is no longer involved in the ‘on the ground’ running of the business it can be difficult to maintain a clear overview of the organisations strengths and weaknesses. It can be equally as straining when CFO’s try to compensate by juggling too many statistics and figures. This article will try and debunk some of the myths surrounding KPIs with ideas coming from both sides of the ‘Business Intelligence’ fence – technology suppliers and CFOs.

What is a KPI?

Understanding this is the central issue and the reason that so many ‘KPI projects’ fail.

As you well know, KPI is an acronym of Key Performance Indicator. They are designed in such as way as to give you a snapshot of your organisation in relation to the goals you have set for it. From it you should be able to see exactly how you are doing against pre-defined criteria be that historical data, goals or competitors.

The problem with management by KPI at a strategic level is that if you want to make big changes, you need to put a big percentage of your effort and focus into changing each selected KPI. The bigger the change you want to make, the harder it is likely to be to make that change, the greater the focus you need to place on the KPI selected to measure the effects.

And that means selecting just a few.

Selecting the right KPIs

So in your business, what are the four things you need to change? How will you measure them? Is four too many, and if you need more KPIs, is your business structured to be able to act on them without creating conflict? And what are you going to do to affect change to your KPIs?

As an example why not use your DSO (Days Sales Outstanding) in your business. How do you measure the difference between time sold to clients and money received in your bank account? Can you measure how long it takes to get there? And can you identify the things that are slowing it down?

In this example, you should think about the journey and transformation taken by the hours of your fee-earners into invoiced hours and invoice value, and then into cash in the bank.

• Is your timesheet system turning records of time into billable hours quickly enough, and if not, why?
• Is your invoice process turning billable hours accurately and quickly into invoice value or is there a time consuming manual element to your billing process?
• How long do your invoices sit in the post room?
• And how long does it take to get those invoices paid?
• Do you need a better credit control and chasing regime?
• What happens when you receive payment?
• Is your cheque handling process up to scratch?
• Can you offer your clients automated electronic payment?

If you were able to take a day out of each of these tasks you would reduce your DSO by five days.

Why is less actually more?

In choosing the right KPIs and committing the whole company to fix one problem, it is much more likely you will be able to swing the performance of the entire business. If you built a list of 20 or 30 KPIs it is quite possible that the most important issues could remain lost in the mix. Focusing on other things might turn around the business, but it is also possible that the company could be split into groups dealing with many different aspects of business, some of which will conflict.

(Check out our small business accounting software guide)

What do you do next?

When you have selected the issues most critical to improving your business and identified the KPIs that will help monitor and deliver change, you need to identify all the business processes involved in processing the activities you wish to measure. From there you can identify the IT and manual systems that manage those processes and report on their throughput and results.

Once you know all the elements that create or report on the performance measured in your KPIs you can start to work out what you need to do to make improvements.

• Do you have IT deployed to manage the right systems?
• Do you have the right IT systems implemented in the most appropriate way?
• Do you have over or under capacity in any resource and can you redeploy more appropriately or do you need to invest?

Being able to identify processes and reporting structures like this means that you can plan a series of small, incremental changes that could bring about a significant cumulative improvement, or identify an opportunity for a major step change - maybe a new IT system to integrate several processes, speed throughput, share information across your business and help improve client service responsiveness.

In many instances you will be able to identify these issues and the steps needed to resolve them for yourself. However, sometimes it helps to discuss options with a consultant able to take an objective and external viewpoint - wood, trees and all that stuff.

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