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”.
Thanks for the reminder. Looking forward to future posts to help me understand further how these numbers/ratios can help me monitor and grow my business.
kbk
Kathleen,
Thanks for the comment. These are just examples. The trick is to figure out which ratios and KPIs give you information that helps you manage better. Not all ratios and KPIs are relevant to all businesses.
Susan
Susan, excellent advice, as usual. It is so important to develop a comfort level with this information and use it to make business spending decisions that lead to profitability.
I remember starting up my first business, and asking different business advisors, “What SHOULD I be spending on X, Y, or Z? Aren’t there any guidelines?” Finding these to benchmark against has always been elusive… can you share some links?
Michelle,
Thanks for your comment. For some businesses their trade associations can provide benchmarks. As I develop the Dashboard I will work on providing links to benchmarks.
Susan