As a business owner or CFO, it’s your job to stay on top of the big picture. This means understanding where the organization is financially, and being aware of the direction in which things are headed. One way you can stay abreast of developments and trends is by keeping an eye on a few key performance indicators – or KPIs.
Why Do Financial KPIs Matter?
On the surface, a KPI may seem like just another metric to waste your time and further confuse your team. But if you feel this way, then you more than likely don’t have a correct understanding of what KPIs are, and the value they afford savvy businesses. One way to better understand KPIs is by thinking about them in terms of medical diagnostics.
“Doctors use KPIs to measure our health and wellbeing. Our body mass index (BMI), blood pressure and cholesterol level are all KPIs that have a specific medical meaning,” points out Xero, a leading provider of accounting software. “In the same way, business KPIs carry specific meanings too. Debt/equity ratio, receivables days and gross profit percentage are all measures that have specific meanings in a business context.”
With the right KPIs in place, your business can analyze everything from marketing campaign efficacy to the true cost of customer acquisition. But perhaps the most useful KPIs are those involving your organization’s financial health. By reviewing KPI examples and studying the purpose of each, you can get a better idea of what goes into the process.
Three KPIs You Should be Tracking
When it comes to your company’s financial health, there’s a lot that goes into determining whether or not things are moving in the right direction. By tracking a few specific KPIs, you can get a better feel for where you are. And more importantly, you can understand where things stand on a minute-to-minute, hour-to-hour, day-to-day basis. No more waiting for quarterly or year-end reports. Suddenly, everything you need to know is right at your fingertips.
- Gross Profit Margin
One of the first KPIs to start with is Gross Profit Margin. This data point shows the percentage of total sales revenue remaining after taking into account the cost of producing the good or service. It helps you see exactly what is contributing to the profitability of the organization.
- Aging Accounts Receivable
For businesses that send invoices to clients, it’s imperative to have an accounts receivable aging report on hand. By digging into the data and understanding which clients are paying bills on time and which ones are dragging payments out, you can identify cash flow problems and determine what needs to be done to speed payments along. You may also discover that it’s actually more profitable to let certain clients go.
- Operating Cash Flow
The Operating Cash Flow KPI will allow you to analyze the overall health of your organization. You should compare it against the total capital employed to see if you’re in a good place. As CompuData says, “This analysis allows you find out if the operational aspect of your business is producing enough cash to sustain the capital investments that you are putting into your business.”
Put KPIs to Work for Your Business
It’s never been easier to collect, track, and analyze data. From free analytics tools like Google Analytics to robust business intelligence platforms, gathering data is a breeze.
This is the good news. However, the bad news is that you still have to sift through the data. The key is to maximize the value of this data by focusing on the right insights. Put the right KPIs to work and you’ll be amazed by what you can learn.