Links to articles about KPIs can be found at the end of the article.
This article will present the important KPI reports (Key Performance Indicators) that every CEO in every company must frequently measure.
The KPIs will be presented concisely and links, explaining and expanding on each KPI, will be attached. Other important KPIs including ways to determine and reach them, will be discussed in the coming weeks.
It is widely accepted that without data and careful analysis, businesses cannot advance. Not assessing and not controlling processes is like driving a car without the ability to see the way or check how much petrol is left in the tank.
Despite this, many companies do not take it upon themselves to determine KPI targets or analyze data. Some CEOs, mainly of small businesses, don’t even bother to check the balance between profit and expenses or how much money had been earned by the end of the year.
Seven most important KPIs
There are seven important KPI reports that CEOs must regularly control, every day, every week, or every month. Two more KPIs must be addressed by CEOs whenever a deviation is identified.
Every report, submitted to the to the CEO by the accountable manager, must be followed by corrective action plans designed to achieve the ongoing objectives and company’s targets.
Of the seven KPIs, the two most important ones are: profit and generating cash. (I am not sure which is more important).
Financial managers are responsible to present the Profit KPI data. CEOs are accountable for the company’s profit.
Profit is the bottom line of the income statement, the total income minus the total expenses.
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
An additional KPI to measure profitability is EBITDA. Here too, CEOs are accountable for EBITDA and financial managers are responsible for presenting the data.
EBITDA is as an indication of the company’s ongoing operational profit (how much profit the company is generating with its assets, products, processes, and existing sales).
Big companies tend to regard EBITDA as an important factor to reflect the company’s profitability.
Profit KPI
To analyze profit reports, the KPI results must be assessed verses the target, verses previous results achieved in the past, and verses results achieved by similar size companies manufacturing similar products.
We may compare our company to a public company, operating in our field of manufacturing which publishes its financial results on a quarterly basis.
Our business profitability results should be checked every month because longer intervals will substantially reduce our ability to correct, improve the results and meet the set target on time.
Generating Cash
Cash flow
A simple report which indicates how much money had been deposited in the bank verses how much money had been spent during a set period of time (a day, a week, a month, a year) These statements are rarely used and surprising as it may seem, are not that important.
A company which does not generate cash will find it difficult to survive, especially these days, when interest rates (cost of money) are high.
Managers must constantly assess how much money is generated, at least once a month. They must always be aware if more money is spent then generated.
Sales
Create an opportunity to earn money. However, the transaction ends only when payment has been received and that is not always trivial. More about that later.
Sales verses targets must be monitored daily. I’ll say it again: every day.
I know CEOs who constantly receive online sales reports and check the sales rate throughout the day. Whenever they identify a slowdown, they call the local manager to understand what is happening. Pushing sales is a frustrating task. It is therefore rewarded with sales bonuses. That is the reason salesmen are the only employees to be granted bonuses. Their need to periodically ease the pressure is understandable, and it is therefore crucial to monitor sales results every day.
Daily sales reports must reach all sales representatives, not only the CEO. The reports must include the actual sales data verses the monthly target and verses the relative target. (Relative targets may be sales achieved during 40% of the month verses 40% of the monthly target).
A sale is completed only after payment had been received. To create an incentive to salesmen to complete the sales, bonuses should only be granted after the sale has been completed and not for invoices or debts that will be paid in the future.
Aging Pay
Are under the responsibility of financial manager.
Aging pay KPI present the payments of customers in debt, the dates they were due, and the number of days payments are in arrears.
On time payment collection can be a challenging process. Payments may gain interest, become too extensive and turn to lost debts. Debts owed to the business must therefore be constantly checked and monitored.
An interim summary: Profit, Sales & Actual Revenue
Four KPI reports must be frequently (daily or weekly) checked by CEOs:
Profit or EBITDA, at the end of every month, as near as possible to the end of the previous month.
Cash flow, or how much money was gained after expenses.
Sales (that create an opportunity to earn money) verses the target, every day.
Actual Revenue or On Time Payment Collection. Aging pay KPI should be assessed once a week to provide a clear view of the situation and avoid financial arrears.
Most businesses sell goods they buy or manufacture themselves. Therefore, CEOs must always have a current view of the company’s ongoing profit, cash flow, sales and actual revenue.
Main production KPIs CEOs must control
OEE – (Overall Equipment Effectiveness) accountability of the operational manager.
OEE is the best KPI to control manufacturing efficiency. It must be checked by the field managers throughout the day and by the operational manager once a day.
I recommend that CEOs check OEE reports at least once a week and when the results are satisfactory (85% and above) once a month, alongside other KPIs.
OEE measures how many good quality products have been produced during a set period verses a theoretical production definition which is set in accordance with definitions of bottlenecks. OEE is affected by machine breakdowns, maintenance, shutdowns, quality of products etc. It should be noted that it is not possible to reach 100% efficiency.
MES systems, which send ongoing OEE data, are available these days. Data can be collected and analyzed on excel spreadsheets but online automatic systems are preferable.
Meeting the weekly production plan – responsibility of operational manager. Frequency of monitoring: once a week.
A weekly production plan is rarely practiced in industry.
Although adhering to it creates an excellent way to increase efficiency and save materials and labor costs. Unfortunately, managers often succumb to customers and sales representatives’ demands to expedite delivery or make other changes to the plan.
Each change to the production plan causes:
- Resetting the workplan: adding or reducing the number of employees on shift (which may entail overtime or cause hidden unemployment)
- Extra purchasing cost for raw materials unavailable in stock
- Extra transportation cost to the manufacturing site.
- Extra cost of delivering the goods to the end customer’s destination.
- Some companies keep a surplus inventory which, in itself, bears high costs.
OEE reports must be used and followed weekly by every CEO who aims to increase productivity and profit.
Supply chain
Inventory Adequacy – responsibility of supply chain manager or production/ operational manager.
Inventory Adequacy is affected by nearly everything that happens in the company and not only by the way the warehouses are managed.
Availability of manufacturing materials affect the company’s bottom line profit. Therefore, CEOs must control it weekly.
Monitoring the available inventory is important to all businesses that store goods or raw materials, be it a small shop, a retailer, or a big commercial business.
Unfortunately, an Inventory Adequacy report is another KPI avoided by many businesses.
Implementing an Inventory Adequacy report is done by weekly checks of actual availability in the warehouse, of five randomly selected raw materials or products, versus the data recorded in the replenishment system.
Compliance is registered only when the number of goods/raw materials and their locations match the recorded data. When products or raw materials are missing from actual stock, delivery is not possible and customers are failed. On the other hand, actual existence of surplus goods or raw material may increase unnecessarily costs.
100% compliance is required. If compliance is repeatedly not achieved.
Check that there is no thieving on site.
Two more KPI reports may prove to be crucial
There are two KPIs that CEOs must follow up every time deviation is identified.
Adhering to the law of work and rest hours and customer complaints.
Adhering to the law of work and rest hours is the responsibility of the Human Resources manager.
Every deviation from the law of work and rest hours can cost the company fines and other sanctions.
An injury caused on route from work to home is considered a work injury which entitles the employee to a government allowance. If an employee worked over the permitted working hours, even if requested by the employee, the National Insurance would not cover the cost. Furthermore, the National Insurance is obliged to report the incident to the Ministry of Labor. Government Inspectors will arrive on site, investigate the incident and examine the ongoing implementation of the work & rest law. The company may be penalized and pay over a million Shekels. The Ministry of Labor also conducts random inspections and sometimes relies on employees’ reports.
To avoid any deviations from the law, CEOs must receive daily reports which they must follow up. They must demand explanations and preventative actions from the employees’ direct managers to avoid reoccurring.
Critical customer complaints – responsibility of the quality manager or production/operational manager.
All customer complaints affect customer satisfaction, but those which can potentially harm customers’ health, like pieces of glass found in foods or food poisoning, may cause severe damage to the business. However, solving the problem and improving the manufacturing process can reduce the damage and may even be a blessing to the company. It is the CEO’s responsibility to be adequately informed, lead the problem-solving process and compensate the customers. In some cases, solving quality issues may require using public relations experts.
Summary and recommendations
There are seven KPIs that every CEO is required to routinely follow every month or every week and two KPIs that need to be followed when deviations are identified.
The routine KPIs are:
- Profit or EBITDA
- Cash flow
- Sales
- Aging debts
- OEE
- Weekly production plan
- Inventory Adequacy
The two KPIs requiring attention when deviation occurs are:
- Adhering to the law of work and rest hours
- Quality control and customer complaints reports
Quite surprisingly, most of these KPIs are not implemented. Some CEOs don’t even check if the company is profitable or not.
I recommend using these KPIs to monitor the company’s progress, to set and follow production plans, determine objectives, and action plans to reach them.
Every manager should be personally accountable for 2 or 3 KPIs at the most.
Part II of this article discusses other important KPIs that CEOs must follow.
My next article will discuss KPIs under the responsibility of other managers.
Links to articles about KPIs
- Management With KPIs : Our Work Method - Targets and Indicators as a tool to help Improve Profits and Performance
- What Is Important for Workers in Israel in 2022 And How Does It Affect the Labor Market?
- Performance Indexes. and Improvement in the Field of Human Resources
- Payment Collection - a Critical Process for the Existence of The Company
- Five most common mistakes shared by CEOs
- About Worker Motivation and Increased Production
- How to generate commitment to perform
- How to create winning teams?
- 4 Important Performance Indicators to Know
- How Can You Prevent Loss of Payments You are Owed?
- The OEE Measure: Improve Efficiency and Maintain Delivery Times
- Increase in Output and Efficiency using OEE measures
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