Board Management Part 3 – KPIs
In my prior post related to boards of directors, I discussed when to add independent directors to your board.
In this article, I will cover some critical aspects of managing your board meetings and the critical role of metrics in telling your story. So you’ve selected your board members and maybe even scheduled out the next year’s board meetings (no easy task so best to settle on the dates well in advance). Now, what will these board members expect?
Metrics: the top of the informational pyramid.
As a senior manager at a company, you likely have a to-do list of 100 things that require your attention. But not all of these tasks are equal. In fact, experience says that only about 5 or so are truly critical to the business. This doesn’t mean that you can ignore the other 95 items – every company needs office space and equipment and a way to pay their bills, for example. However, the CEO and other senior managers must spend a disproportionate amount of time on the things that truly move the needle.
Key Performance Indicators (“KPIs”) or metrics are the key drivers of your business and are ideally presented as a one-slide dashboard that provides the reader with a high-level view of how the business is operating. A dashboard represents the top of the informational pyramid and for people who are not involved in the day-to-day running of the business, it is a great way to give board members a snapshot of the company’s health. CEOs often use a dashboard to start a board meeting as a way of guiding the conversation. The board then does deep dives on the relevant topics of concern.
Why should I be so focused on compiling a dashboard?
There are two primary reasons for taking the time to design and assemble your dashboard. The first is that it is a terrific team-building exercise. The management team must agree on your specific set of KPIs and figure out the best way to measure them. This often engenders some important conversations about what your critical decisions are and can be a tool for helping to set company and individual goals.
The second reason is that a good dashboard can provide your directors (and other readers) with a succinct understanding of the business and the way the management team is thinking about the operations. A good dashboard will show trends, both bad and good, in your KPIs and allow you to explain the trends and what you are doing to improve or reinforce them.
How do I determine what my KPIs should be?
There is no simple answer to this question, however, a few general guidelines can help.
Revenues – for companies lucky enough to have revenues, this is probably the single most important metric and is usually a good proxy for success. What is your revenue growth? What are your major segments and how healthy is each? What is the forecast for the future?
Sales Pipeline – inextricably linked to your revenues is your sales pipeline. Do you have enough leads that will convert into sales and allow you to achieve or exceed your goals? How is the sales team performing? What are the underlying trends in your Average Selling Price (“ASP”)?
Cash – is still king. How much cash do you have? What is your burn rate? When will you need more cash and how are you going to raise it?
Financial metrics – the right financial metrics depend on the business, but some typical examples are:
- Revenue per employee – a measure of how efficient you are as a team
- Days Sales Outstanding (DSO) – how efficiently are you collecting your accounts receivables?
- Quick Ratio – a measure of how well you can meet your short-term liabilities
- Net Income – are you a profitable company?
- Earnings Before Interest, Taxes, Amortization & Depreciation (EBITDA) – related to Net Income, but often used as a proxy for cash flow.
There are a multitude of financial ratios and picking the right ones for your business takes some trial and error.
Once you’ve determined a set of KPIs, you must ensure that you and your team can access timely and accurate data. This is easier said than done, because you must collect information from various people and parts of the organization and then present it in a concise, informative fashion. For example, to present sales pipeline metrics, your CRM (such as Salesforce.com) must be well maintained and up to date. Otherwise, it’s “garbage in, garbage out”.
How do I present my KPIs so people understand?
KPIs should always be quantitative, though you can use things like color coding or arrows to indicate a qualitative measure. You will have to determine whether it is better to show a trend (See Exhibit 1 below) or to compare your actual results against a benchmark such as your budget. Or perhaps both. You should also tailor your dashboard to your specific industry. Ask your board members or other advisers for examples of KPIs that they have seen or think relevant.
There is no magic to designing a dashboard. It depends on the industry in which you operate and remember, your KPIs may also change as your company evolves. Above all, your dashboard should be a way of directing the conversation with your board, investors and potential partners.
Chris Thomajan is TechCXO’s Managing Partner – Boston. See his full bio and contact information here.