In trying to monitor your business's performance, it can be hard to know where to start. It helps if you narrow your focus to a few core business activities.
Focusing on the right things will help you save time and money. The tools that will help you focus on achieving your business goals are:
- critical success factors
- key performance indicators
What is a critical success factor?
A critical success factor (CSF) is an essential business activity that must be performed well to achieve your business goals.
Your CSFs should receive constant attention from management.
What is a key performance indicator?
A key performance indicator (KPI) is a tool that you use to measure your progress towards achieving your CSFs. Effective KPIs:
- are achievable and quantifiable (able to be measured)
- align to your CSFs and business goals
- limit your focus to the areas that are most important to business success
Choosing critical success factors
To set CSFs that will help you achieve business success, you should first review your:
- overall business operations
- operational environment (both internal and external)
- business performance, including financial, operational and strategic
Aim to set between 4 and 8 CSFs. This will make them more manageable and achievable. Select the activities that are the most meaningful to your business and will be the easiest to assess.
If you're not sure where to start, you could begin by looking at how you manage your business finances or revisit your marketing plan. Finances and marketing are critical activities for most businesses.
Setting key performance indicators
KPIs will vary between businesses. Because every business has different goals and needs, there are thousands of measures that can be used as KPIs.
Choose KPIs that:
- mean something to your business
- can be easily measured (you don’t want to have to create new reports or data sources each time you need to measure)
- give outcomes to achieve your CSFs
How to measure key business areas with CSFs and KPIs
To keep your CSFs in line with better business practice, consider setting one or two on the following areas:
- internal business processes
- learning and innovation
Your financial measures need to tell you:
- the financial viability of the business
- if the strategy has financial benefits
Consider the following examples of financial CSFs and possible KPIs.
Example CSF – Strong cash flow
KPIs for strong cash flow might include:
- positive cash flow balance for each 12-month forecast, or
- access to finance facility
Example CSF – Profitability growth
KPIs for profitability growth might include:
- sales growth of 2.5% per month
- no change in gross margin, or
- reduction in expenses by 1% per month
Your customer measures need to tell you:
- if you're satisfying the customers' needs
- how customers see you
Consider the following examples of customer CSFs and possible KPIs.
Example CSF – Customer retention
KPIs for greater customer retention might include:
- number of repeat purchases per customer over 6 months, or
- number of new customers over 6 months
Example CSF – Customer service reliability
KPIs for customer service reliability might include:
- number of customer returns, or
- percentage of time on delivery (KPIs)
Internal business process measures
Your internal business process measures should tell you what needs to be improved within the business to deliver to your customers and other stakeholders.
Consider the following examples of internal business processes CSFs and possible KPIs.
Example CSF – Environmental sustainability
KPIs for environmental sustainability might include:
- increase the recycle of waste in the office by 2 cartons per month, or
- introduce a 'green' policy for purchasing and working with other business partners
Example CSF – Optimise resource allocation
KPIs for optimal resource allocation might include:
- increase employee sales as a percentage of net sales, or
- reduce excess and aged stock by 20% by half year)
Our guide to accounting and financial policies and procedures is a good place to start to make sure your internal financial processes align with best practice.
Learning and innovation measures
Your learning and innovation measures should tell you what needs to be done to improve and innovate to create value for your customers and stakeholders.
Consider the following examples of learning and innovation CSFs and possible KPIs.
Example CSF – New product introduction
KPIs for the introduction of new products might include:
- number of new products compared to competition, or
- increase stock turnover by 5% per month
Example CSF – Improve workforce training
KPIs for improved workforce training might include:
- each employee to attend one training event yearly, or
- 5% of workforce to achieve improved strategic skills for the financial year