Evaluating your company’s performance can be a daunting task. The need to focus on daily operations and the challenges that regularly arise often result in small and mid-sized business owners pushing this big-picture concept to the back burner. Using key performance indicators (KPIs) is a great way to help keep tabs on how things are going and can provide you and your team a way to stay focused on the areas that can drive the greatest improvements.
Key performance indicators (KPIs) are most effectively thought about as measures that highlight (or indicate) progress toward a desired goal. These are the early signs or symptoms that allow you to project whether or not a target will be hit or a project or goal will make it across the finish line. The KPIs you identify should help you and your team focus your actions and drive intelligent choices about how to operate.
Defining the right KPIs for your business
The variety of options for KPIs is extensive and what you select needs to be driven by your goals for your business. Many common KPIs are based on watching your finances and provide a good way to monitor progress toward profitability. But establishing non-financial KPIs can be vital to ensuring long-term success, particularly in areas such as customer satisfaction and employee retention. Regardless of which ones you select, for them to be effective, KPIs must be:
- Clearly communicated
KPIs also vary widely by industry and by department. For example, in the restaurant industry, percentage of food waste or seating efficiency are often good items to track and measure to try and improve performance. In manufacturing, asset utilization or first-pass yield results may help to keep the team on track to achieving the big picture wins of profitability and growth. Reflect on what you want to achieve this year and work backwards to find the right approach to measuring progress toward your goals. You can also find online resources that can help you get started in finding the right measures for your business, or connect with a professional that understands your business and can point you in the right direction.
Key Financial Performance Indicators
KPIs for operational performance, personnel matters, customer satisfaction levels and more are vital for tracking how your business is doing. But there are several financial KPIs that can’t be ignored. Monitoring the top four KPIs below can help to ensure that your business stays on the road to success.
1. Gross Profit Margin
This value is an indication of whether or not you are selling your goods or services at a high enough price to cover your costs. The formula to calculate this is:
Gross profit margin = (revenue-cost of goods sold)/revenue
If this number is not large enough, your ability to grow your business will be limited. When faced with that reality, it becomes time to look for ways to reduce your fixed expenses and/or increase the price at which you can offer your products or services.
2. Net Profit
In the most basic terms, your net profit is the money you have left after you have paid all of your expenses. If your bookkeeping is in good order, the math is straightforward:
Net profit = total revenue-total expenses
Software offerings such as QuickBooks and QuickBooks Online combined with the services of a professional accounting firm can help ensure that your financial tracking and management is always up-to-date, allowing you to see this information at a moment’s notice.
3. Net Profit Margin
This shows you what percentage of the money you brought in through sales was actually profit, and is calculated as:
Net profit margin = net profit/total revenue
Looking at profit as a percentage of revenue can help you make decisions about items like pricing changes or the need for increased efficiency.
4. Aging Accounts Receivable
Making and selling products and services is not always the biggest challenge a small to mid-sized business can face. All too often collecting payment for those goods and services is just as big a hurdle as the creation or sale of them. Customers who are slow to pay can be the source of serious cash-flow problems. Creating a report that allows you to track the age of outstanding invoices, and a process that ensures a regular review of that report, can help improve your bottom line.
Tracking the data that contributes to all of the above is vital to business success, but it can be a fairly involved process. Partnering with a financial expert can allow you to remain focused on your core business value while not shortchanging your ability to plan for the future.