How well is your business really doing? Here’s a “key” to let you know!
Do you know if your business is performing well? If so, how do you know? Maybe you look at the bottom line and see there is a profit? Maybe you just make sure there is cash in the bank account?
These might be indicators that the business is surviving, but they don’t give you an idea of how well the business is performing. To know how your business is performing, it can be very useful to track some of your businesses key performance indicators (KPI).
Key performance indicators are measurable values that help determine if a business objective is successful. These can be used throughout the organization to measure success. It is important to pick metrics that are important to your business. They should be metrics that you understand and that are meaningful to it.
There are many financial KPI’s that can be useful to track. One area that is important to every business is cash flow. There are a couple metrics that work together and can be tracked to improve cash flow. These include Days of Sales Outstanding and Days of Payables Outstanding. These are ratios that measure how long it takes to collect receivables and how long it takes to pay vendors.
As an example, let’s say your customers pay you every 60 days on average and you pay your vendors every 20 days. Over time this is going to hurt the cash flow of the organization because you are sending cash out faster than you are collecting it. By tracking these metrics, it can point out these problem areas, and you can work to improve them over time.
Now that you understand there is a problem area, you can work to fix it and find viable solutions. If your vendors give you 30-day payments terms, you can take advantage of them and wait the full thirty days to make payments. On the collections side, consider offering a small discount to entice customers to pay sooner. These are just a couple options that could help improve cash flow in this example.
Once you understand and track these numbers, then it is important to benchmark them. They can be compared to your own performance to track how you do each month or each year. By tracking them over time, you might notice trends in the organization’s performance. If you implement changes you’ll want to note when these changes occurred so you can measure the effectiveness of those changes.
These metrics can also mean something different for each industry. Sixty days of sales outstanding might be very good for one industry, but could be ruinous for another. Make sure to compare the metrics to the industry in which your business operates to truly get an idea of what that number means. This is an effective way to see how you are performing in comparison with other, similar businesses.
KPI’s are an invaluable form of gathering business intelligence. They can help identify problem areas for a struggling business and proactively plan to achieve success I encourage you to consider utilizing them in your business.