Just as tracking calorie intake and burn rate helps achieve weight loss goals, KPIs (Key Performance Indicators) provide measurable, actionable data to track progress and ensure business success, rather than relying on hope alone.
Primary Implication
One of the hardest things for most people to do is to lose weight. It’s hard to eat less and exercise more. Those who achieve their weight loss goal do it via tracking their calorie intake and burn rate. They do this to sustain daily adjustments to their food intake levels. Those who don’t do this struggle to realize their weight loss goals.
Business owners who struggle to make money are usually fighting the same problem. They are taking in too many expenses (calories) than they cover through their sales (burn rate.) Those who look to make more money than they spend use KPIs to make real-time adjustments to their business, so they never realize their profit and cash reserve goals.
Overview
An analogy compares two things to create an improved understanding of one subject by comparing it to a more commonly understood concept. For example, one of the underlying reasons why management teams fail to use key performance indicators to confirm whether planned actions are happening or not is because they fail to appreciate the significance of how KPIs are the quantification of critical success factors.
To appreciate the power of KPI’s consider the goal of attending your class reunion in six months 20 pounds lighter than you are today. Your goal is to lose 20 pounds by May 30, so “I look my best at my class reunion.” Your planned action is to cut out 500 calories daily, consuming 250 calories less per day via diet and burning 250 via exercise beginning today.
Your leading metrics, referred to as KPIs for realizing your 20-pound weight loss goal, your lagging metric, or Key Results Indicator (KRI), are your planned actions of consuming 250 fewer calories each day while you burn 250 more calories. To realize your goal, you must constantly wrestle with what you will eat less or not eat and how + when to burn those 250 calories each day by tracking your calorie intake and calories burned.
Tracking your daily calorie intake and burn rate with a report to your spouse or friend prearranged basis is how you confirm you are doing what you should. If you realize your KPIs, you will likely lose weight at the end of each week. Your confirmation of whether this happened or not occurs when you step on the scale to determine your actual change in weight.
If I’m averaging 2,500 calories per day vs. 3,000, I will be making positive progress toward my goal after three months of tracking. If I don’t track my actual calories consumed and burned, I approach my goal via the “hope” method. I’m hoping I lose the 20 pounds with no measurement confirming that I’m doing what I need to do to realize my goal other than when I step on the scale. Weight loss rarely occurs if your only measurement is your weekly weigh-in.
KPIs serve as indicators of the likely results of your actions. These metrics are outcome predictors that are harder to measure but easier to influence and improve upon directly. The business equivalent of calories consumed is COGS, and calories burned are the cash inflow from Net Sales.
If you aim to earn a Gross Profit of 40% on sales, you can only consume 60 cents out of every $1.00 in COGS. Consume more than $0.60 on every dollar sold, and you will not realize your Gross Profit goal. The math is as simple as that. The challenge is staying on top of your direct cost spend relative to sales. Consume too much cost, and you will not realize your Gross Profit goal.
The decision to use KPIs or not comes down to the question, “Would you rather know day-to-day or weekly how you are doing vs. waiting for 3-months to confirm whether what you are doing is working or not relative to realizing your goal?”