Your business financial management will only be successful if you know your key performance indicator facts and act based on what they are telling you. Over the last few weeks, we have discussed the importance of having a business/financial plan for your company and how to use this as a tool for ongoing planning using rolling forecasts and fine-tuning. The key performance indicators are aspects that should be an integral part of both your business’ plan and ongoing planning processes.
The key performance indicators discussed below should be viewed as a reference or guide. Essentially, they are like a checklist that will ensure that both your plan and ongoing evaluation truly do consider and respond to the essential components that make up a business and its success. Beck and Company Certified Public Accountants and Business Advisors are experienced in helping customers with their accounting and business practice needs. Please contact us so we can assist you in these processes.
Key Performance Indicators (KPIs) to Consider and Evaluate:
A key performance indicator or KPI is a type of performance measurement that organizations use to evaluate overall finances or a particular business activity’s success. When you evaluate KPIs, it is essential that you compare them to both your general business plan AND to your prior year’s results to get the best overall picture of where you are and what direction you are likely heading in. Here are ten important KPIs to evaluate within your organization.
- New Business Bookings Monthly Recurring Revenue (MRRs)- income from new customers that a company has reasonable assurance will occur at regular intervals in the future
- Net Business Bookings (after attrition)- a combination of income resulting from existing and new customers
- Recurring Revenue of Invoiced Customers– income from customers that a company has reasonable assurance will occur at regular intervals in the future
- Gross Profit Margin– profitability ratio that measures how much of every dollar of revenue is left over after paying for the cost of goods sold
- Operating Expenses– expenditures a business incurs to engage in any activities not directly related to production of goods and services
- EBIDTA– Earnings Before Interest, Taxes, Depreciation and Amortization
- Headcount– the total number of people employed in the organization
- Capacity Utilization Rate or Operating Rate– a measure of the rate at which potential output levels are being met or used that shows efficiency versus slack in the business economy
- Cash Balances and Debt Ratios
- Accounts Receivable Days Sales Outstanding (DSO)- a calculation that estimates the average collection period to illustrate how well a company’s accounts receivable (AR) are being managed. An equation for this would be= AR/Revenue X # of days
In addition to these top ten KPIs, there are many others that are also important. When it comes to customers, consider these KPIs: the cost of customer acquisition, the average revenue/billings per customer, the attrition value and percentage of recurring revenue from customers, and customer survey results. With regards to the business and employees, these KPIs should be addressed as well: the revenue and cost per employee, the number of months it takes to break even on sales and marketing costs, the current ratio of assets versus liabilities, average selling prices, the return on investment for both sales and service personnel, and the break-even point in revenue.
If you are a part of a non-profit organization instead of a for-profit business, you may need more specific guidance with regards to your organization’s financial management. In addition to the topics we have discussed regarding these best practices for businesses that are still applicable to non-profits, you can find more specific information for non-profits effective financial practices and reports by visiting here.
Our goal is that the financial management best practice information and tips over the past three weeks have benefitted and assisted your company. For more assistance related to your specific business, Beck and Company CPAs offer free consultations to assist you with any accounting needs you may have. Please contact us for more information, and we look forward to the opportunity to assist you.