Every larger company has its own department that controls the respective goals. In Controlling, various facts and figures are compiled, analysed and presented to the management. Two important factors here are the company’s key performance indicators (KPIs). Although both factors are similar, there are significant differences.
The difference between a company metric and a KPI?
A company key figure only reflects the performance of the company or a single department and can be considered a relative or absolute number, depending on the approach and interpretation. In contrast, there is the KPI, which can be calculated down to a single unit in the business process. Of course, both figures play an important role in monitoring the success of a company, e.g. the key figure turnover can be used to see how well the company has managed, while the key figure utilisation of the machinery can be seen whether an increase in production is still possible. Based on these figures, the company can then make decisions and thus control the business/production process.
What make good KPIs in controlling and which ones have proven to be the most useful so far?
Good key figures are characterized by their informative value. They must clearly reflect the results of the financial year or the period in which they were calculated and must be comparable with each other. It doesn’t help if you have simple numbers, but don’t know what they say or how the development should be interpreted. The range of metrics that have proven useful is very small and can be broken down as follows:
• Success Ratios
• Liquidity Ratios
• Profitability Ratios
• Balance Sheet Ratios
• Debt Thinking Ratios
• Turnover Frequency Indicators
The individual key figures in controlling can be broken down and subdivided even further, for example, the key performance indicator “total profit” can be broken down into “sales”, “profit” and “profit before tax”, but this is not absolutely necessary.
How does a company choose its key figures?
Which key figures are important for a company depends on many factors. On the one hand, there is the size of the company. A small or medium-sized company will be satisfied with a few key figures, while a large company or a corporation will have a very large selection of key figures because different departments work together. Another factor is the production process. The larger and more complex it is, the more key figures are needed.
What problems and sources of error occur?
Although the key figures are all characterized by a comparative character, you cannot simply compare one company key figure with another, as the significance is not always the same. Sales and returns are still the easiest to compare, while sales indicators are more difficult and the comparison of the really important key figures, such as the throughput time in production/order processing, is not measurable. Another source of error that often occurs is the one-sided focus on the key figures. If you only focus on sales and do not question fluctuations, misinterpretations and the making of erroneous decisions are inevitable, so you should try to keep the respective key figure as transparent as possible.
How are key figures processed and communicated?
Towards the end of the financial year, a report is submitted to the management, which is accompanied by a presentation. While the report addresses all the factors that contributed to the determination of each metric, the presentation must be kept as simple as possible. Graphs and lines can be just as helpful as a single, meaningful picture that makes it clear where you stand and what the current trend is. Based on this presentation, appropriate decisions are then made by the management.
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