Starting a Business From an Accountant's Perspective : The Importance Key Performance Indicators
A couple of weeks ago we talked about the importance of job costing. This week we are going to continue our series about starting a business from an accountant's perspective by looking at the importance of key performance indicators or KPIs.
So what are KPIs and why are they essential?
According to KPI.org
"KPIs are the critical (key) indicators of progress toward an intended result. KPIs provide a focus for strategic and operational improvement, create an analytical basis for decision making and help focus attention on what matters most."
So in essence KPIs help you define what matters and help you track if your organization is going in the right direction. If you don't have and don't track KPIs you won't know if your organization is heading where you intend it to go.
So what makes a good KPI?
Going back to KPI.org, good KPIs have 5 traits. They:
"Provide objective evidence of progress towards achieving a desired result."
"Measure what is intended to be measured to help inform better decision making."
"Offer a comparison that gauges the degree of performance change over time."
"Can track efficiency, effectiveness, quality, timeliness, governance, behaviors, economics, project performance, personnel performance or resource utilization."
"Are balanced between leading and lagging indicators."
What are some good KPIs?
Now that we know what good KPIs looks like let's look at some examples. Here are some of my favorite financial KPIs
Gross Margin %
Net Profit %
AR Turnover in days
Service or Product Margin %
Gross Margin % tells you if you are making enough profit the items or services you sell in aggregate make.
Net Profit % tells you if your business is making money.
AR Turnover in days tells you if your customers are paying you on time.
Service or Product Margin % tells you which of your products or services are profitable.
The target for these KPIs should be set by historical data and market competition. This way you are striving to beat your best but also your competitors.
Operational KPIs might look like
Customer satisfaction %
Lead Conversion %
Cost Per New Customer
KPIs can be any combination of financial and operational information. The important thing here is that they are objective and you can easily track them.
Once you have chosen your KPIs, you need to set a target. This should be where you want your business to go. The target should be achievable and limited by time. To set your target, you should take into account your historical performance but more importantly the performance of your competition.
For example, if you have chosen to track your net profit margin %. You would want to see what you had achieved historically. Say last year you ended with an average margin of 10%. Then you would what to gather information about your competition. This might be harder but for this example say they have an average of 11%. Your goal should be to beat your margin and your competitions. So maybe 11.5% average. If that doesn't seem achievable, then lower it and in the following years try to outpace your competition.
The last and most important step. Track your performance. If you come up with the best KPIs and set amazing targets but don't track your performance to those targets, you just wasted a lot of time. So make sure you can easily and effectively track your performance. For small businesses, I recommend using Fathom HQ to track performance. It integrates with Xero and Quickbooks and once set up all you have to do is pull it up.
Running a business is stressful and hard. Don't make it harder by not knowing where you are and where you want to be. Take the time to set good KPIs and track them. Remember the KPIs are not set in stone. If after a while of tracking them you don't see value in one or two of them change them until you get a set of 5 or 6 which help you see the health of your business from high level and let you make decisions from them.
If you would like advice or help on picking, setting up, or tracking KPIs the team at Walston Advisory Firm would love to help. Give us a call ((801) 999-0743), text ((801) 999-0743), or email (firstname.lastname@example.org)