Nemanja Šljivar, Head of Advisory at TPA Srbija, explains why it is important for any company to recognize the importance of KPI management for the purpose of optimization and sustainability in doing business.
In the course of doing business, all companies pass through the phases of launching their operation, its growth, stabilization and decrease. In this way, irrespective of the quality and price of products or services offered to the market by a company, they will in one phase result in increased volume of operation, after which follows saturation of the market that causes stagnation and fall in business activity.
What is the role of management based on the Key Performance Index (KPI) in the life cycle of a company? Namely, KPI are the parameters that evaluate the level of success in doing business and sustainability of the business strategy. More than 90% of the most successful companies in the world are using KPI management to administer their operation. Management based on these parameters enable an extension of the phase of growth in the life cycle of a company, and also in certain circumstances a shift from the phase of stagnation through generation of a new growth of operation.
The experiences of TPA Srbija show that small and medium-sized enterprises in Serbia are not using even the basic KPI management tools in administering their operation. Planning and analysis departments in these companies are based on the reporting of their respective managements about the results achieved as simple overviews in a certain period. Such information does not provide clear guidelines to the management what a priority is, and/or what is of key essence for improvement of the operation and how it can exert impact on them. Also, web applications doing the financial analysis have additionally undercut the importance of KPI management. By simple searching through these applications one gets the credit rating of all companies that disclose publicly the financial statements in Serbia. Such state of things does not contribute in any way to a better understanding of the financial analysis task which is: definition of real KPI of a company as its ultimate goal. Establishment of credit ratings by way of web applications has resulted in having the employees in the companies who can check without any excessive need of understanding the essence of a financial analysis process, if the credit rating of a company is good, medium or bad. This does not change the fact, evident to all after a short analysis, that the companies which are smaller in size have a much better credit rating than the market leader in the same activity. Does it mean that the market leader is facing difficulties or is it the outcome of excessive simplification of the complex process of a company’s financial analysis?
The above question shows the relevance of KPI management in small and medium-sized enterprises. Namely, the objective of doing business is the profit rather than a better credit rating with a certain credit rating agency. Business processes in small and medium-sized enterprises are not complex and, accordingly, do not require a detailed analysis in order to have KPIs defined at the level of the business processes (for example, procurements, sales, production …, etc.). The most efficient form of KPI management application in the companies of this size, which is exceptionally “cost effective“, is to retain experts who will on the basis of a detailed financial analysis of several juxtaposed periods define the financial KPIs for a company. Once these parameters are defined, all operation processes in a company change and get adapted for the purpose of accomplishing these KPIs.
Definition of KPI and targeted management of operation, in order for these financial purposes to be achieved, are rendering extraordinary successful results. TPA Srbija projects dealing with definition of KPI and provision of support to management in accomplishment thereof, have in practice increased several times the volume of operation, reduced indebtedness, and augmented the company profitability. It is rather simple to detect that a certain company has difficulties with liquidity; however, concrete measures for improving liquidity require understanding of the procurement, production and sales policy in a company. Combination of the financial analysis results and practical business solutions represent the most efficient possible KPI management for small and medium-sized legal entities in Serbia.