Goals vs KPIs - Which one is S.M.A.R.T.?
No matter what business you are in, you need to accurately measure whatever drives your business’s performance. There are a limitless number of things that may be measured in any business, but the specific set of metrics that YOU will focus on can be put under one label: KPIs or Key Performance Indicators.
A KPI (or set of KPIs) can help you understand the performance of your business in any specific area. They can be measured against and expectation (budget or goal) to catalog the difference between actual and goal, or they can be trended over time to measure the effectiveness of policies and programs.
As an example, let’s say that your business’s main focus is achieving more Revenue. There could be a number of KPIs that help you to drive revenue improvement – examples include product mix, “same store sales” or year-over-year comparable revenue, new client acquisition, and promotional tracking. By looking at each one of these KPIs, you can understand how it impacts the overall goal of “increasing revenue” and whether your goals have been met or not:
KPIs vs Goals
Many (very many, in fact), articles will tell you that your KPIs need to be S.M.A.R.T. This is a misnomer – but before we can get to WHY this is a misnomer, we must first introduce the concept of a Goal and explain how it is different than an KPI.
A Goal is simply a “desired outcome or result”. It is the aim towards which the organization is working. The KPI is the metric or indicator that tells you whether you’re achieving your goal and by how much. Goals may be related to and intertwined with the KPIs -- but they are not the same and getting them confused could cause negative consequences. For example, a KPI of “same store sales” may tell you that these sales are negative (down) year over year. In this case, you are still tracking the KPI, but you have missed the goal.
Now you can hopefully see that it is your GOALS and not your KPIs that should be S.M.A.R.T. --- but what does that mean?
S – Specific
What EXACTLY do you want to achieve? By answering this question, you can target your efforts to truly achieve it. Without specificity, it is hard to know what to focus on:
For example, a non-specific goal might be “increase revenue”. The more appropriate Specific goal would be “Increase average sales per day by $5,000” or “Sell 10,000 units of our product this month”.
M – Measurable
Measuring progress towards your goal (using a KPI) is key to understanding whether you are going to meet the goal, and perhaps taking additional action to meet it if necessary.
By publishing this measurement, you can keep your team on track as well, keeping everyone motivated on achieving the goal, especially as the time period of the goal (deadline) grows closer.
A – Achievable
The goal needs to be realistic and attainable to be successful. This doesn’t mean it should be EASILY attainable, in fact your goal should stretch the organization’s abilities, but it can’t break them or be outside of the capacity available.
For example, you might set a goal that your manufacturing organization create 10 widgets per day. However, if your manufacturing capacity is only 5 widgets, no one will buy in to your goal.
Similarly, goals should be achievable by the unit or group that is being tasked with it.... each unit of an organization might not be able to produce the same output. Take the example of 2 tire stores – 1 in an area of high income with many automobiles and the other in a small town with only a few cars and relatively low income. It will be impossible for each of these 2 stores to achieve the same sales goal. Setting a goal that you know can’t be attained sets your team up for failure from the beginning. Set a goal for each of the stores that shows you understand the capacity and restraints.
R – Relevant
The goal you’re setting must be in line with other goals and objectives, and match the market conditions and environment.
Perhaps your overall goal is to grow revenue (whose isn’t, right), so you set your sights on a few specific goals to help you get there. Let’s say you’re a restaurant and your wait staff tells you that they feel that people are staying at the tables for an extended amount of time. If you set a goal of “turning tables” more frequently without ensuring that average check size does not decrease, you might actually hurt revenue rather than help it!
A better approach to relevant goal-setting in this case might be to change KPIs to $/hour rather than either dollars per ticket or time per ticket individually.
T – Timely (or Time-Bound)
A goal without a time frame is just called a Dream! To be effective, the time frame for achieving the goal must be clearly stated. If applicable, sub-time periods might be used to measure milestones along the way.
For example, you might have a monthly sales goal of $1 Million. However, if your sales happen routinely by day, you should be doing $33k/day if you’re open 30 days in the month… otherwise, you might be off track. The time period and the goal are particularly aligned. If most of your sales happen on Fridays, then Friday’s sales goal should be way different than Tuesday’s!
Now that you understand what S.M.A.R.T. Goals are and why they’re important, consider what goals are important for YOUR business to achieve. Then consider what KPIs are most important to measure to get there! Need help determining what’s important? A Fractional Finance Department from PPS Solutions provides strategic advice and industry expertise to help you cut through the THOUSANDS of possible KPIs to focus your energy on what’s important to drive your business in the direction you want it to go. Find out how we can help today by booking a consultation at www.ppsfinance.com!