This is Part 3 in our “Know Your Numbers” series, which will help you read your financial statements, better understand the numbers that drive your business and ultimately make better decisions.
In Part 2, we discussed how your revenues, gross profit and net income can be different numbers based on how they are calculated. Once you clarify those numbers, you can use them as “key performance indicators” of your company’s overall financial health.
What are key performance indicators?
A key performance indicator (or KPI) is a quantifiable number or value that gives insight into how effectively your business is achieving its identified objectives.
Let’s break that down a little further:
“Quantifiable number (or value)”
Instead of randomly looking at your business to get a feel for how it’s performing, analyzing a quantifiable number or value that is tied to data removes subjectivity and provides a more accurate view of performance.
Every businesss has financial metrics. However, with key performance indicators, we are looking at specific financial metrics that will drive progress toward achieving a business objective. This turns a financial number into a key business driver and helps you measure success. It’s especially important here to find those numbers that truly drive value for your business. Take a look at these common industry ratios for ideas.
Establishing clear, succinct business objectives helps inspire action and move your company toward its goals. SMART criteria is a popular method for goal setting. It describes that an objective should be:
- Specific – target a particular area for improvement
- Measurable – quantify how progress will be measured
- Attainable – make sure it’s achievable
- Realistic – you are willing and able to achieve it
- Time-based – grounded with a deadline
6 questions to create your own KPIs
Consider these questions to help establish the quantifiable values that will measure your firm’s effectiveness:
- What is your desired outcome? (e.g., sales growth)
- Why does this outcome matter? (e.g., to increase profitability)
- How are you going to measure progress? (e.g., # of sales, $ value of sales)
- Who is responsible? (e.g., Sales manager, President)
- How will you know you achieved your outcome? (e.g., sales have grown by the desired percentage or dollar value)
- How often will you measure your progress towards your outcome? (e.g., monthly, quarterly, annually)
The beauty of KPIs is that they can inspire and motivate all levels of a business. As your organization works together toward these key financial metrics, everyone will see progress and begin to feel the results of their hard work!
For more information on how to select KPIs that will track your company’s financial health, reach out to our team.