By Bob Irish
Published in CEO-IQ, Volume 4, Jan-Feb 2004
In the last issue I discussed enhancing your bottom line by communicating five key messages to employees. In this issue, we’ll look at what to listen for to predict the future profitability of your company.
Every month, CEOs receive financial reports that convey important information such as how much was sold, how much was shipped, what the receivables look like, etc. – Necessary information to know. It clearly tells the CEO where his company has been. Are there any messages imbedded in the huge quantities of data crossing the CEO’s desk every week to tell him where his company is going? CEOs not only need to know how their organization has done, but should be listening for signals that indicate how it will perform in the next couple of quarters. If the CEO can predict negative trends before they show up in last month’s data, he can take corrective action and prevent them from occurring or at least significantly minimize their impact.
However, most organizations don’t willingly yield to such critical data. For the CEO to have early warning signals he can hear, he must build them in to the data gathering structure of his company. He does this with Key Performance Indicators (KPIs).
KPIs measure critical items that the CEO needs to know in advance to tell if his organization will meet its goals and objectives. KPIs are not the same for all companies, but every CEO has said to himself or herself at one time on another, “I wish I’d known about this a few months ago.”
Consider one critical example. In April, the head of a medium size firm was telling his board that everything was on track for meeting the goals for that year. Sales to date were right on target. Margins had slipped slightly. By November, he was telling his board that sales for the year would be eleven percent below the previous year and profits would be seventeen percent below plan. How did a situation that looked so promising become so disappointing? Had the CEO built into his reporting system KPIs for the number of bids, proposals, or quotes sent out per week and the margin on every order booked, he would have heard the message loud and clear.
While sales were still on track in April and May, his KPI for bids would have told him the number of sales opportunities was dropping off. In June and July his margin KPI would have shown that to win the sale, the final pricing on orders from the earlier bids was losing margin. In both cases he could have taken action to prevent telling his board in November that he would fall short of the plan. Better yet, he could have taken steps to reduce the failing performance levels. Build KPIs into your reporting system to ensure you know what you need to know in time to do something about it.