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Management needs timely, accurate feedback to guide operating decisions, anticipate problems and take advantage of emerging opportunities. Unfortunately, comprehensive financial statements take a long time to generate. Reporting key performance indicators (KPIs) on a monthly or weekly basis is a simplified alternative to gauge performance in real time.
Popular financial metrics
KPIs measure an organization’s progress toward its objectives. However, with so many metrics to choose from, data overload can easily happen. That’s why your KPI report should be customized and streamlined to cover the metrics that are the most critical to your success.
KPIs differ from one company to the next based on the industry and the company’s objectives. Common examples include:
Operating cash flow
This helps management evaluate how much cash is available for immediate spending needs. Poor cash flow, not slow sales or lagging profits, is one of the leading causes of business bankruptcy.
Return on assets
This metric equals net income divided by total assets. It measures how effectively your company is managing its assets to generate earnings.
Inventory turnover
The number of times inventory is converted into sales is usually computed by dividing cost of goods sold by the average inventory balance. This tells you how efficiently you’re “selling through” inventory. Many companies waste valuable cash by allowing slow-moving inventory to sit idle on their shelves for too long.
KPIs can also be industry specific. To illustrate, auto dealers might compare new vehicle sales to used vehicle sales; contractors might focus on the bid-hit ratio; and hospitals might want to know the average wait time in the emergency room or the bed occupancy rate in the intensive care unit.
Beyond the numbers
Many companies also include nonfinancial metrics in the areas of customer service, sales, marketing and manufacturing. However, nonfinancial KPIs must be both specific and measurable.
For instance, just saying that your company wants to “provide better customer service” doesn’t produce a sound KPI. Instead, if your goal is to improve response time to customer complaints, a relevant KPI might be to provide an initial response to complaints within 24 hours, and to eventually resolve at least 80% of complaints to the customer’s satisfaction.
Benchmarking results
A basis of comparison is important when reviewing KPIs. Benchmarks will provide a standard against which you can compare to see how your KPIs stack up. You can benchmark your current KPIs against historical results or averages published in trade publications.
This will help you spot trends and identify potential problems, allowing you to deal with them before they worsen. For example, if your accounts receivable days are lengthening, it might indicate that your collections are lagging and a cash flow crunch is looming.
Unlocking the keys to success
During the pandemic and the ensuing economic turmoil, tracking relevant performance metrics is more important than ever. Threats and opportunities abound — and new ones seem to arise quickly. We can help you tailor your KPI report to meet your business needs, as well as find meaningful benchmarks based on current market conditions – reach out to us today.
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A handful of typical KPIs are beneficial to a broad group of companies, such as revenue growth, profit margin, EBITDA, working capital, etc. These KPIs should be tracked by most companies.
However, many of the most beneficial KPIs are those that are tailored for your specific goals and objectives. These can be both financial and nonfinancial KPIs. These tailored KPIs generally support many of the “typical” KPIs listed above.
Some of the most tailored KPIs are non-financial. Choosing the right non-financial metrics can be a daunting task, but these should be considered as important as financial KPIs. Non-financial KPIs can be very useful in tracking and locating a company’s pain points. This information can be turned into improvement points that drive the performance of financial KPIs. For example, a combination of customer satisfaction and retention KPIs analyzed in conjunction with customer acquisition cost and customer lifetime value KPIs can allow a company to take a more in-depth view of its customer base. It may prompt decision-making surrounding customers, such as recurring customer incentives, that may not have been considered in the past without the information provided by these non-financial KPIs.
Most importantly, your KPIs should evolve as your company evolves. KPIs are great tools to track strategic objectives of a company, but if they never change, then there’s a likelihood the measured KPIs are misaligned with the company’s current objectives. When a company begins its future goal setting, KPIs should be involved in the discussion - no matter the time frame.
The frequency of reviewing KPIs depends on the information you’re tracking. While many KPIs are reviewed monthly or weekly, some metrics, you might want to track daily. A daily KPI is most likely reviewed by production staff and supervisors. Daily KPIs should align with the goals of the quarterly or annual KPIs that are tracked by owners or management of the company.
For example, a manufacturing company might set a KPI for daily production; a metric that would be followed by production employees and supervisors. At the same time, a KPI for annual production may be a company objective, which would be viewed and followed by company owners on a monthly, quarterly or annual basis. Following these KPIs helps the employees of the company, and their outputs, to stay aligned with goals and objectives set by management.
When 415 Group examines a client’s KPIs, we use a combination of both historical results and industry trends for analysis and goal setting. The main consideration is ensuring the industry averages are generated for the appropriate size of the company, as these can significantly shift based on the size.
Sometimes, a historical database to view trendlines may not be available. In that case, we compare industry benchmarks for similar-sized companies in the same industry, and, after the initial set up, certain obtainable goals are put in place with appropriate plans to achieve those goals.
415 Access assists in determining and providing KPIs that are beneficial toward meeting the goals of your company. We offer customized KPI reports that help remove all the ancillary data, so the focus remains on what your management team determines is most important.
If you’re interested in setting meaningful KPIs that can drive the future of your company, reach out to 415 Group today.