Vesta clients hear our advisors use the term “Key Performance Indicators” or see the acronym “KPI” written in our service descriptions. However, not everyone is a CPA. So what exactly is a Key Performance Indicator, and how does it relate to your financial outlook?
Key Performance Indicators, which we will refer to as KPIs from here forward, focus on strategic and operational improvements. KPIs provide information about what happened in the past and can also help inform leaders about the future. They establish bases for decision-making and help owners focus on the areas of their business that require it the most.
Tracking and comparing KPIs allow managers to determine long-term plans and fix short-term problems. KPI data enables business owners to approach their operations and finances proactively.
With all the apparent benefits from KPIs, one would assume that they would be widely used and adopted by business leaders. However, paying attention to KPIs is sadly not the norm.
KPIs are easy to identify and can be developed for any business. The challenge is that business leaders become overwhelmed with so many numbers. It becomes difficult for them to note those most critical to watch.
What is often forgotten about KPIs is the word “Key.” The numbers that can help managers guide their businesses are the “key” numbers. “Key” numbers are usually just a few crucial measures, but they are not always easy to determine. First, we must think critically about what makes the business tick.
Vesta’s advisors assist business owners in focusing on the KPIs that matter most to their success. Vesta also helps educate owners and managers in understanding KPIs and how they can utilize them to their benefit.
Now that you know what KPIs are and how they relate to your business, what are some KPIs to keep track of and analyze? Here is a short list of some typical KPIs Vesta recommends for small business clients:
- Cash Flow Forecast – Cash flow forecasts are one of the most important KPIs for a business. They assess if sufficient cash will be available by forecasting profits, savings, costs, and expenses weeks ahead.
- Gross Profit Margin – Gross profit margin as a percentage of sales is an expression of a business’s profits on selling its products and services. Gross profit margins measure pricing adequacy and the relative efficiency of operations and purchasing.
- Revenue Growth Rate – Revenue growth rate refers to the rate at which a business’s sales increase. Regular revenue growth rate calculations measure whether a business’s revenue increases, decreases, or remains stagnant.
- Days Sales Outstanding – DSO, as it is referred to, measures how many days, on average, it takes for a company to collect on its accounts receivable. It is an essential indicator of how long the business is waiting for its cash and how effectively its collection policies are functioning.
- Inventory Turnover – Inventory turnover keeps track of how much of a company’s inventory is sold or used within a specific period. Tracking inventory turnover is crucial as it indicates a business’s ability to move goods. While a high inventory turnover rate is generally good, it could be harmful if the profit margins on the inventory are too low.
- Accounts Payable Turnover – Calculating accounts payable turnover provides the rate at which a business pays for its purchased goods and indicates how long it typically hangs on to its cash before paying suppliers. Keeping track of accounts payable turnover is a crucial cash management strategy that helps businesses determine when and how much to pay suppliers.
These are just a handful of KPIs that affect a business’s daily operations and profits, as well as its long-term goals and profitability. Regularly monitoring these or other relevant KPIs will help a company remain at the forefront of its industry.
Vesta’s business advisors can provide insight into creating and tracking critical numbers in your business. Together we can help you analyze and develop the necessary KPIs to help guide your management decisions.
Learn more about KPIs and how Vesta can put them to work to profit for your business. Contact a Vesta advisor today!