Love them or hate them…..KPI or Key Performance Indicators are a great way of assessing your business performance and creating a strong roadmap for your business growth.
KPI’s are very important for analysing your business finances. Financial statements with KPI provide management with relevant, reliable and comparable information so owners-managers make informed decisions.
I work with entrepreneurs helping them understand their financial statements so they can plan for the future. Below are a few of my suggestions to help you use KPI effectively in your business.
Balance sheet: Your balance sheet is a snap shot of business at specific intervals. The following KPI’s are a great way to understand your balance sheet.
- Current ratio: current assets / current liabilities ratio conveys a business ability to pay its current liabilities. The higher current assets in relation to current liabilities, the healthier a business is.
- Accounts receivable turnover: This KPI is net credit sales for the year / Average accounts receivable for the year. This will convey a business the number of times accounts receivable turns over in a year.
- Days in accounts receivable: This will convey a business the average number of days a receivable sits on the books before actual collection.
- Inventory turn-over: This shows costs of goods sold for the year / average inventory for the year. This will convey a business the average number of times a year inventory is turned over.
- Day’s sales in inventory: This will convey a business the average days in a year it takes a business to sell its inventory.
Business can use this information to take corrective measures. E.g. Shift to just in time inventory will eliminate cash outlay for inventory before its sold and receivable gets collected. This will therefore increase working capital.
The following are KPI’s for income statement performance:
- Gross margin: gross profit / net sales will convey a business the percentage of sales available for a business after direct costs expenses are incurred.
- Profit margin (after tax): This shows a business its actual profit from a sale after direct and indirect costs are incurred.
KPI’s are great performance improvement tools. They are most useful if measured at regular intervals to compare performance in terms of meeting your business financial goals.