From the inception of their companies, business owners are strongly advised to utilize key performance indicators (KPIs) to effectively monitor performance. This advice is well-founded, as overseeing business metrics can be akin to watching the gauges while driving a car – essential for maintaining optimal speed and knowing when maintenance is needed.
Similarly, this approach is crucial for managing a business efficiently.
However, with the multitude of KPIs available, it can be easy to feel inundated with data. If you have found yourself tracking various KPIs only to become overwhelmed, it may be beneficial to revisit the fundamental concept of KPIs. This allows for a clearer reassessment of which indicators are most suitable for your specific business needs.
Financial metrics
One way our team at Rudler recommends choosing KPIs is to separate them into two broad categories: financial and nonfinancial. Starting with the former, you can subdivide financial metrics into smaller buckets based on strategic objectives. Examples include:
Growth. Like most business owners, you are probably looking to grow your company over time. However, if not carefully planned for and tightly controlled, growth can land a company in hot water or even put it out of business. So, to manage growth, you may want to monitor basic KPIs such as:
- Debt to equity: total debt / shareholders’ equity, and
- Debt to tangible net worth: total debt / net worth – intangible assets.
Cash flow management. Maintaining or, better yet, strengthening cash flow is certainly a good aspiration for any company. Poor cash flow — not slow sales or lagging profits — often leads businesses into crises. To help keep the dollars moving, you may want to keep a close eye on:
- Current ratio: current assets / current liabilities, and
- Days sales outstanding: accounts receivable / credit sales × number of days.
Inventory optimization. If your company maintains inventory, you will no doubt want to set annual, semiannual or quarterly objectives for how to best move items on and off your shelves. Many businesses waste money by allowing slow-moving inventory to sit idle for too long. To optimize inventory management, consider KPIs such as:
- Inventory turnover: cost of goods sold / average inventory, and
- Average days to sell inventory: average inventory / cost of goods sold × number of days in period.
Nonfinancial metrics
Not every KPI you track needs to relate to dollars and cents. Companies often use nonfinancial KPIs to set goals, track progress and determine incentives in areas such as customer service, sales, marketing and production. Here are two examples:
- Let us say you decide to set a goal to resolve customer complaints faster. To determine where you stand, you could calculate average resolution time. This KPI is usually expressed as total time to resolve all complaints divided by number of complaints resolved. In many industries, a common benchmark is 24 to 48 hours.
- Perhaps you want to increase the number of sales leads you close. In this case, the KPI could be sales close rate, which is typically calculated by dividing number of closed deals by number of sales leads. Benchmarks for this metric vary by industry, but somewhere around 20% is generally considered good.
Nonfinancial KPIs enable you to do more than just say, “Let us provide better customer service!” or “Let us close more sales!” They allow you to assign specific data points to business activities, so you can objectively determine whether you are getting better at them.
Scalable measurements
At Rudler, we recommend you select a few KPIs that are most relevant for your company and monitor them over a substantial period to gather valuable insights. From there, adjustments can be made based on the insights obtained.
As your business evolves, you can increase the number of metrics you track or reduce them if you are in a phase of consolidation. Your Rudler, PSC advisor can help you identify the optimal KPIs for your business currently and can support the integration of new ones in the future. Contact us at 859-331-1717.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Brandon Hughes, Staff Accountant and Evan Kandra, CPA.
If you would like to discuss your particular situation, contact Brandon or Evan at 859-331-1717.
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