7 simple KPI’s to track financial performance

Key Performance Indicators (KPI’s) are metrics that enable you, as the business owner, as well as your trusted management team, to have insight into the performance of your business based on accurate facts, figures and trends.

Why are KPI’s important?

They are essential tools that show areas of strength and weakness and not only highlight if you are on the road to success or not, they also assist in helping you make better decisions for the future of your business. Read more on our handy help sheet: FAQ – KPIS’s to track financial performance KPI’s can come in all shapes and sizes and don’t always just relate to financial matters. For example, there are KPI’s that measure how successful your marketing is and your sales process as well as KPI’s to understand your customers and to test the effectiveness of your operational procedures. This article though focuses on Key Performance Indicators for measuring financial performance.

Knowing what your end goal is

There literally are hundreds of KPI’s that can be used to track financial performance. That’s why it is important is to understand the business objectives first and in turn this then helps relate the relevant KPI to the business objective. After all there is no point reporting on something that is of little or no interest to overall goals.

Accessing and deciphering the data

Many businesses have one of two problems: 1) Either, they don’t have enough data available to make the calculations for the KPI’s they need. This comes down to creating better systems to provide this data. 2) Or, they have the problem where they have so much data and calculate so many KPI’s that they don’t know which to focus on. This comes down to being more strategic. Understand your end goal and select a handful (between 5 and 10) KPI’s that can be reported on and analysed regularly and consistently.

Which KPI’s to choose?

Here are 7 basic KPI’s that can be obtained easily from the information on your monthly or annual Profit and Loss and Balance Sheet. For doctors and dentists they will be a good starting point to understanding your financial performance. A KPI that measures the income earned from the start of the financial year to the date in which the report is generated

• This KPI can be compared to the Cumulative Income YTD at the same month in the previous year to gauge annual growth.
• This KPI can also be mapped against total annual target income to ensure you are on track to meet target.

A KPI that measures the income in one month compared to the income in the same month in the previous year.

• Good for looking at seasonal trends; i.e. if income was low in one month last year it may be the same this year due to external factors.
• This KPI also helps with planning and budgeting for future years. If you know income is always low in say August then perhaps encourage staff to take holiday then or arrange a specific marketing campaign to try to turn results around.

A KPI that simply measures the rate at which Income grows (or declines) month on month or year on year.

• Calculated as Income in month / (divided by) Income in previous month
• This KPI is useful to spot trends of income and determine reasons why peaks and troughs occur.
• Great for mapping on a graph so that the KPI can be represented visually.

Income to Wages %

A KPI that measures the difference between Income and Wages, presented as a percentage, so representing the value of the workforce in conjunction with generated income. Or in other words, what you have to pay your team to generate income for you. If you work independently this is not so relevant, especially if you are a director drawings dividends.

• Calculated as Wages / (divided by) Income
• This is useful to determine inefficiencies in your workforce.
• This KPI can in fact be used for any “expense” to provide a %. Wages is just useful as one of the bigger expenses that a business incurs.

A KPI that measures the difference between Income and the cost of generating that income, presented as a percentage.

• Calculated as Gross Profit / (divided by) Income
• This KPI can be compared month on month and year on year to track consistency.
• The higher the Gross Profit % the better as it means there are little costs associated with generating the income

Net Profit %

A KPI that measures the difference between Income and all costs, including wages and overheads, presented as a percentage.

• Calculated as Net Profit / (divided by) Income
• This KPI can be compared month on month and year on year to track consistency.
• The higher the Net Profit % the better as it means that costs are being managed and there is ultimately more profit.

A KPI that compares Assets to Liabilities, presented as a percentage.

• Calculated as Assets / Liabilities (on your Balance Sheet)
• This KPI represents your ability to pay off any Liabilities (credit, loans, trade creditors) with the Assets (bank, cash, trade debtors)
• The higher the Liquidity Ratio the better as this shows that the business assets (what it owns) exceed the liabilities (what it owes).

Figurit can advise further on how to analyse your business performance and create reliable systems to generate the necessary reports. Call today to discuss on 020 7376 9333