From items in inventory to days of accounts receivable and number of on-time deliveries, an endless flow of data keeps the pulse of a business. The size of the torrent can make it hard for business owners to make use of it. But they can reduce complexity in business and keep an eye on performance by focusing on their firm's key data points.
What makes a key data point—also called a key performance indicator or KPI—depends. Many businesses watch cash-flow forecasts, gross profit margins, sales growth, inventory turnover, accounts payable turnover and market share. But the key data points are different for many others.
“If inventory isn't an issue for you, you don't need a KPI for that," says Ray Rebello, director of product marketing for Acumatica, a Bellevue, Washington maker of cloud-based enterprise resource planning software for mid-sized companies. “You may need a KPI on how many goods are being returned to you. Or maybe it's how long your folks are staying on the phone."
—Tom Kelly, senior director of product marketing, NetSuite
The calendar and circumstances are also factors in using key data points to reduce complexity in business. Key points for an annual presentation to the board are likely to be different, for example, from the ones used in a weekly sales meeting.
“You could have things you're concerned about on a daily basis, things you're concerned about on a weekly basis, things you're concerned about monthly or quarterly," says Tom Kelly, senior director of product marketing for San Mateo, California-based cloud financials company NetSuite.
Some Key Data Points to Watch
Among the widely used and often checked key data points are accounts receivable, accounts payable and cash balances.
“Those are things that have meaning on a daily basis," says Kelly.
"For marketing-oriented organizations, KPIs meriting close and frequent attention may include the number of calls salespeople are making. They might also look at the number of followup calls and quotes they are submitting," Kelly says.
"Manufacturers may want KPIs showing whether key production equipment is up and running and where bottlenecks are developing in a production line," Rebello says.
“That's important to know in real time," he adds.
At EVENTup, an online marketplace of event spaces based in Chicago, CEO Jayna Cooke says the key data points she watches closely are customer acquisition cost and customer lifetime value.
“To me it shows the picture of what your long-term profitability is going to look like," Cooke says.
“If your customer acquisition cost is $500 a customer, but your lifetime value of that customer is only $600 and you have 1,000 customers, your total bottom line is still really small," she elaborates. “If your customer acquisition cost is $10 and your lifetime value is $1,000, that's a pretty good number."
Cooke checks those numbers monthly, plus a year-end review. She also tracks a six-month average of daily impressions and daily visitors to the company's website.
All told, Cooke says she has about 16 key data points she monitors on a daily, monthly or less frequent basis. The company's programmers created code to let her generate the data points with a keystroke or two, using figures from the cloud-based customer relationship management system.
Limiting KPIs to Reduce Complexity in Business
Even a small business can generate masses of data. Accounting and resource planning software packages provide dashboards that can be stuffed with innumerable KPIs. Meanwhile, owners have limited time and attention. So it's a good idea to consider limiting the number of data points a business owner tries to follow closely.
“You can't work on too many things at once," Rebello notes.
He suggests owners evaluate their own ability to juggle different data points. They could start with up to a dozen or more, and then adjust the number until they feel comfortable.
Kelly suggests beginning with three to five key data points and expanding cautiously.
“I don't think there's a magic number but there is definitely a law of diminishing returns," he says.
Key Data Points: A Cautionary Tale
Data reflects reality but it's not reality itself. That's why experts and business owners urge caution in applying conclusions driven solely by data.
“One of the pitfalls is that people get so stuck on the numbers that they forget about customers," Cooke says. “Think about the whys behind this."
She also warns against overreacting to fluctuations that may be brief.
“If we have had a bad week and the lifetime value of a particular cohort goes down, I wouldn't ring the fire bell," Cooke says. “But if you see that over a three-month trend, it may be something to look at."
Also bear in mind that today's key data point may be less important tomorrow. Business owners might consider re-evaluating from time to time whether they are watching the right data points.
“It's important to change as quickly as need be if a particular metric is not driving desired results or behavior," Kelly says.
While using key data points can reduce complexity in business, deciding which to follow, how often to check them and what to do with the information is no simple task. These decisions may be some of the more important ones a business owner makes.
“At the end of the day, knowledge is the competitive advantage," Kelly says, “and how you apply that dictates how your organization will perform."
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