KPIs and Why Do They Matter
Key Performance Indicators (KPIs) are critical to monitor your progress. Typically, these are simple to set up to monitor. If they are not easy to set-up that is a sign your accounting software may need to be updated or more likely that you need to change your accounting processes to capture the information by recording transactions into more detailed accounting buckets. Step one though is determining what KPIs are unique to your company.
These are common KPIs:
- Cash Flow. In almost any business, they monitor their cash position. How much was sold, total cash in the bank, cash not collected, and sales not billed yet less current expenses and pending expenses. This is a staple in most companies.
- Days Sales Outstanding (DSO). The number of days it takes to collect invoiced accounts receivable (AR) impacts the cash flow KPI. In addition, aged AR is an indicator of potential bad debt which can seriously reduce profitability. One simple hint to reduce your DSO is to have a collections policy and then to reinforce it by calling clients who go past their terms. Using a collections agency should be your last resort.
- Inventory Turns. For some businesses, this is not a factor, but others who have inventory and specifically inventory that spoils, this metric is critical. In the food industry this is a critical metric. The other side of inventory is the carrying cost. Stocking up ensure no shortages but then you need to factor in the cost of financing that inventory while it sit’s.
Other KPIs can include:
- Inventory shrinkage and waste
- Employee turnover
- Cost of debt
- Margin by product or service line
- Case costs for law firms
- Burn rates for Non-profits or PE backed companies
- Project cost tracking
- Percentage of project completion
- The potential list is endless
The key is monitoring what’s unique to your business that drives value? What KPIs are you monitoring? If it’s just the basics you may want to expand your scope to add in a few other items. KPIs add long term value as well. They can help you refine processes, change the way you sell or who you sell to, alter training, revisit cost control or pricing, alter distribution strategies and engage more of your team toward building company value. We would welcome the opportunity to discuss working with you to establish or refine the way to track KPIs in your business.