How do you set KPIs? The financial ones, and the ones that ring earlier

Hook

Boss, a small test first. Without looking at a report, can you state three numbers right now? How much you did this month, roughly what percentage the gross margin is, and how much your customers still owe you. Not many bosses can. Not because they do not care, but because nobody has picked for them which three numbers they must look at every month. The last lesson was about budgets, and a budget tells you where you are going. This one is about KPIs, and a KPI tells you whether you are on the road.

A KPI is not "a few more numbers"

First, break a myth. A lot of people think setting KPIs means printing a few more lines off the report. It does not. The definition is simple: the few numbers you have decided to watch, watched closely enough that when one moves, you do something. That last part is the whole point: you do something. A number you have looked at for three months and never once made a decision on is not a KPI, it is decoration. So before setting a KPI, ask yourself: when this number gets worse, what do I intend to do? If you cannot answer, leave that number off for now. More KPIs is not better. Three to five is about right for most SMEs.

Financial KPIs: four directions

The financial ones first. There are really four directions, and one from each is enough. First, are you earning? Gross margin, or margin by item or by job (the ninth and tenth lessons). Note: not turnover. Turnover is vanity; margin is what feeds the family. Second, are you collecting? Receivables ageing (the sixth lesson) — what proportion is past the agreed terms. Profitable on paper with no money in the account is usually explained right here. Third, can you hold on? How many months the cash can still burn — the runway from the last lesson. That is the number that decides whether you sleep at night. Fourth, is it running away from you? Fixed overheads as a proportion of turnover. Nobody watches it when business is good; when it slows, it is the first thing to bite. Four directions, four numbers. Enough.

Non-financial KPIs: why they ring first

Now the more important half. Financial KPIs have a built-in flaw: they are slow. By the time the gross margin drops, it happened one or two months ago. Financial numbers are the result — lagging indicators, in English. What genuinely lets you act early is the non-financial KPI — leading indicators. Some that get real use. Food and beverage: daily covers, table turns, ingredient wastage. Wastage rises before the margin drops. Retail and minimarkets: stockout frequency, days of slow-moving stock. Money turned into goods stuck on a shelf does not show on the profit and loss yet. Services and professional trades: quotation-to-order conversion, on-time delivery, number of customer complaints. Manufacturing: on-time delivery rate, rework rate, machine downtime. And one that applies to every trade: staff turnover. When people keep leaving, every other number turns ugly afterwards. See the relationship clearly: the non-financial ones ring first and the financial ones ring after. Watch only the financial ones and you are always a step behind.

How to set them and how to read them

Here is a very practical method. Step one: write the objective first, then pick the numbers. Not "watch whatever numbers exist" but "here is what I want to achieve this year, so here is what I have to watch". The objectives come from the budget in the last lesson. Step two: pair them up, one objective to a pair. One financial plus one non-financial. For example: the objective is to hold the gross margin, so the financial one is gross margin percentage and the non-financial one is the wastage rate. One tells you the result, the other tells you why. Step three: write the definition down. What does "number of customers" mean — those who ordered, or those you contacted? Same word, two people, two answers, and that KPI is dead. Write it down, exactly like the accounting policies in the thirty-fourth lesson: the ruler cannot change. Step four: read them at a fixed time. Read them together after the monthly close (the thirteenth lesson). With no fixed time it becomes "whenever I remember", and by the time you remember something has usually already gone wrong. Step five: review once a year. The business changed, so the KPIs should change. What mattered last year may not this year.

To close

In summary: the value of a KPI is not in looking at many, it is in looking and then acting. Three to five is enough, and each one needs an owner, a definition and a fixed time to be read. The financial ones tell you the result and the non-financial ones tell you why — read both and you will move before things go bad, rather than confirming it afterwards on a report. Want to know which ones your trade should be watching? Grab a coffee first and talk about your business. For the accounting, come to LTT. I am Lim Tau Tat, helping SME bosses get their accounts straight. Follow us, and see you next time.