Monitor your financial performance with these 7 simple KPI’s
Key Performance Indicators (KPI’s) are not just a “nice to have” part of running a business, they are an absolutely essential part of running a business. At least, essential if you want to be strategic in your approach to success. KPI’s are carefully selected metrics, statistics and calculations that when reviewed over a period of time uncover trends and enable a business owner to make more educated decisions based on facts and figures and not just guesswork.
Where to start with KPI Reporting
To be in the position to calculate KPI’s, you need to first have the available data to extract and manipulate.
Ask yourself these 3 questions:
- Does my accounting system give me easy access to a Profit & Loss Account and Balance Sheet Statement (as a minimum)?
- Is my accounting system kept up to date on a monthly or (at the very least) quarterly basis?
- Can I allocate a few hours per month to analyse the financial performance of my business and put a plan in place to continue to grow my business?
The answers need to be “YES” as this will allow the KPI reporting process to be effective and carried out on a regular basis.
How frequent is it required to report on KPI’s?
Information needs to be “real time” to be effective, so current rather than historical. Depending on the size of your business will depend on how frequent you need this to be but typically a medium sized business will review KPI’s on a monthly schedule. This is frequent enough for action to be prompt after discovery of a specific area that needs attention yet not so frequent that it eats away all your working day in financial admin.
Some commercial businesses though track KPI’s on a weekly or even daily basis. It really depends on the your goals and objectives as well as the availability of the information, data and resources required to prepare the KPI’s.
Determining your business goals, first
As there are literally hundreds of KPI’s that can be derived from analysing financial data, it is important to first understand your business goals. This way you can be strategic right down to the level of deciding which KPI’s to report and focus on. Else, you could end up spending unnecessary time just analysing, reporting, analysing, and reporting and on factors that don’t play a part in achieving your objectives.
Most business owners when asked about their business goals suggest things like:
- Making more profit
- Spending less time at work
- Selling the business
Setting SMART Targets and Goals
These business goals are all honorable aims for a business owner. In fact there probably aren’t many business owners who wouldn’t like to make more profit, whilst spending fewer hours at the desk and then one day sell up for a large lump sum and retire!
When undertaking financial reporting it is helpful to first set targets so that any KPI’s can be made relative and specific progress towards those targets can be measured. Subsequently, targets need to be SMART.
If targets are set with the above in mind then tracking monthly KPI’s against them will be significantly more meaningful.
For example, let’s rework the initial business goals as SMART goals.
- Making 10% more profit in the next six months
- Taking Friday afternoons off to collect the children from school
- Selling the business for a £5 million profit in 3 years tim
Which KPI’s to report on?
Which KPI’s to report on very much depends on the business goals but some simple KPI’s to consider as a starting point are as follows:
1) Cumulative Income Year to Date (YTD)
Measuring the income earned between the start of the financial year up until the current date. Useful to assess whether target income is going to be achieved with the remaining days, weeks and months in the financial period.
2) Income – Year on Year
Measuring the income from the same month over different financial years. Useful to spot seasonal trends like months where income is low every year. This helps with more accurate target setting in future years as well.
3) Income – growth rate %
Measuring the % of growth or decline month on month, or year on year.
Useful to understand why some months are better performing than others.
4) Income to Wages %
Measuring the cost of labour resources required to generate income. As one of the more significant costs a business incurs this is a good KPI for cost management and to highlight how efficient your workforce is.
5) Gross Profit %
Measuring as a percentage how much it costs to directly generate the business income. Useful to track direct costs and ensure consistency in profit before overheads and wages.
6) Net Profit %
Measuring as a percentage how much is costs in total to generate the business income. This includes wages and overheads as well as just the direct costs associated with the Gross Profit %. Useful to track profit in general and ensure financial targets are likely to be met in the required timeframe.
7) Liquidity ratio
Measuring the businesses ability to pay off debts and liabilities with its cash and assets. Useful to assess the health of the business in terms of managing debts.
Simple steps to becoming a more strategic business owner
In summary, follow these steps to start to be a more strategic business owner:
Make your financial data available on a regular basis
Allocate time each month to preparing and analysing your KPI’s
Determine your SMART business goals
Prepare KPI’s to discuss with the rest of your trusted management team
Take action where discoveries are made. The most important factor!
Streamline over time the KPI’s that you report on.
For assistance with KPI reporting, including help with accounting systems, accessing data for KPI Reporting and setting SMART goals, Figurit can help. Call the Figurit commercial team today on: 020 7376 9333