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What does success mean to you?
The success of a business depends on a wide array of contributing factors, including both financial and non-financial data. Key performance indicators (KPIs) represent quantifiable measurements you can use to evaluate the success of your organization in meeting your business goals.
KPIs can be extremely helpful in understanding the success of your business. For example, if your company is experiencing a negative profit margin on each sale of a certain product, then you know it might be time to consider whether that product should be discontinued. Or if you see that your days sales outstanding continues to climb, then you know it is time to buckle down and have your accounts receivable team start making those collections calls.
Without KPIs, measuring your progress or spotting fixable setbacks can be difficult.
KPIs come in all shapes and sizes. There are financial ratios, non-financial ratios, and ratios that include a mix of both. Below is a list of some of the more common financial ratios.
These ratios measure the ability of a business to meet its short-term obligations. Common liquidity ratios include:
These ratios measure the ability of the business to meet its long-term obligations. Common solvency ratios include:
These ratios measure the ability of a business to generate profit. Common profitability ratios include:
Non-financial KPIs can also be critical to the success of your company because they monitor activities and their effectiveness related to your business strategy. In short, they help capture your company's strengths and weaknesses and often provide context for your financial KPIs.
Though non-financial KPIs aren't associated with finances, they can be either quantitative or qualitative. Common non-financial ratios include those measuring recruiting and employee satisfaction, customer experience, internal processes, and business development.
As you work on determining which metrics truly measure the success of your business and identify those as your KPIs, remember that this is a learning process. Feel free to pick the KPIs you think are most applicable to your business now, but be ready to adjust and pick new metrics if you identify one further down the road that better meets your business goals.
As you go about selecting your key performance indicators, here are a few tips to keep in mind that can help increase the benefits KPIs can provide your business.
It is important to identify which metrics are the most meaningful to you and your specific business, and focus on those. Only measure what truly matters to you and your company.
While focusing on just a few, it is important to include a set of diverse metrics as your identified KPIs in order to avoid a hyper focus on a single KPI, which can incentivize manipulative behavior.
It is important to determine how often you will look at each metric and in what format you would like to see the information when you examine it. Sometimes it may take some groundwork to ensure you are able to get accurate information on a timely basis and in the format you require.
A lumber trader will care what profit margin they earn on each type of wood, while a company that provides aircraft transportation services will want to know what profit margin they earn per flight hour. Find out what KPIs are most commonly measured in your industry.
Theodore Roosevelt once said, "Comparison is the thief of joy."
While Roosevelt was correct for some aspects of life, when it comes to running your business, comparisons can be a helpful tool.
KPIs provide insight on the success of your business. However, they can provide a whole new level of value when used to compare your business to others.
For example, you can compare the total profit margin percent earned by your company last year to the total profit margin percent earned by your competitors. If you compare your profit margin percent to others in the industry and find that it is significantly lower, that may help trigger the question of why that might be the case. Then you can dive into the issue to determine whether your sales prices are too low or whether your cost of sales has increased more than the industry average. You can continue to dig deeper by asking yourself "Why?" until you have arrived at the root cause of the difference.
When determining what KPIs would be most beneficial to use when comparing your business to your competitors, remember that each industry has different KPIs that are meaningful specifically to that industry. For example, a company in the beverage industry might want to know what their profit is per bottle, while a retail company might care more about their profit per square foot. While there are many KPIs that are specific to individual industries, there are also some ratios that can be helpful in comparing businesses across industries. Many of the ratios specifically identified above can be helpful no matter which business or industry you are analyzing or comparing to.
When comparing your business to others, don't become hyper-focused on one metric. Comparing the businesses across multiple metrics will help you get a clearer picture of each company. While your competitors may be stronger than you in certain ratios, you may beat them in others. But having the knowledge of where you stand in certain aspects of the business can help you identify where to focus your time on making improvements in the future.
But you are a solo business owner — how can you find out what your competitors are doing?
You want to gain insight into what KPIs your competitors are using to measure the success of their business, but you also want to know the industry average of those KPIs for your specific industry.
That is where Delap comes in! As an integrated financial services firm that provides compliance and advisory services to hundreds of businesses in a variety of industries, we have access to industry information that can be helpful in this process of benchmarking your company.
Please contact our team today and hear how we can help you!