Do you know what’s going on in your business?  Do you get standard financial reports on a timely basis?  It’s hard sometimes to look at these standard reports and know what’s happening.  As a result sales decline and expenses grow for a lot longer than is necessary.

Developing the key ratios and key performance indicators (KPIs) for your business will help you manage different aspects before anything gets out of hand.  If you don’t know where to start turn to the trade group for your industry.  They can suggest ratios and KPIs you want to measure and give you the same information for like companies to compare against.

A few examples of key ratios and KPI’s include:

• Current Ratio: Total Current Assets/Total Current Liabilities
• Acid Test Ratio: Cash + Accounts Receivable/Total Current Liabilities
• Average Collection Period: Accounts Receivable/Average Daily Credit Sales
• Gross Profit Percent: gross margin/sales

Great you’re saying…but what does it tell me?  You will need to prepare a few successive periods of these ratios and KPIs before you can see any trends.  Ask your controller or CFO to explain the information or your CPA firm.  The confusion will soon give way to clear indicators of what needs immediate attention in your business.

Look for future posts on using key ratios and KPIs which I like to include in a report called “The Dashboard”.