You’ve heard about KPIs (Key Performance Indicators) and know that other businesses use them to measure success. Should you be tracking them? This guide will explain what KPIs are, provide some examples, and give advice on how to use them to make better decisions.
What are KPIs?
KPIs are metrics that measure how effectively a business is achieving its key objectives. Think of them as the vital signs of a company, showing its health and performance. KPIs offer insights into whether the company is on track or veering off course. They are not random figures; rather they are carefully selected to reflect the most important aspects of a business’s performance.
Here are some common KPIs to help you get started. Don’t worry if some of the terms seem technical at first; these examples will help clarify things. For additional help, you can refer to this article we wrote on accounting terms.
Balance Sheet KPIs
Balance Sheet KPIs are crucial metrics that provide insights into a company’s financial health, operational efficiency, and overall performance. Here are a few key KPIs commonly used:
Current Ratio: Measures your ability to pay current bills. It is calculated by dividing current assets by current liabilities. A ratio above 1 indicates good liquidity (how quickly you can get your hands on your cash).
Debt-to-Equity Ratio: How much the company owes to what is owned. It is calculated by dividing total liabilities by total equity. A lower ratio suggests lower financial risk, which means your business has less risk of loss in the event of a crisis.
Return on Assets (ROA): Shows profit from the stuff you own. It is calculated by dividing net income by average total assets. This ratio indicates how effectively a company is using its assets to generate profit.
Profit & Loss KPIs
In addition to measuring your ability to pay bills and overall financial risks, businesses want to examine KPIs related to revenue. Here are a few basic Profit & Loss KPIs to begin tracking.
Gross Profit Margin: The money you keep from sales after covering the cost of goods sold (COGS). It is calculated by subtracting COGS from total revenue and dividing the result by total revenue.
Net Profit Margin: Measures your overall profit. It is calculated by dividing net income by total revenue. A higher net profit margin indicates greater profitability.
Revenue Growth Rate: Shows how much your sales are growing. It is measured by the increase or decrease in revenue over a specified period compared to the previous period. This metric can help you spot trends in your sales cycle.
How to use KPIs to make decisions
Tracking metrics in your business is very good, but how can you use this information to make decisions? Here are a few suggestions on how to use these KPIs to their best potential.
- Compare KPIs to previous periods. The best place to measure yourself is against yourself. For example, try comparing your Revenue Growth Rate for this year to the previous year, or the past five years. Once you start seeing trends you can dig deeper into what generated those results.
- Compare KPIs to industry benchmarks. If your business specializes in a specific industry, you can often find resources with industry metrics. Comparing your performance to the industry can reveal areas that could be improved.
- Use KPIs that are relevant to your business and its needs. Focus on KPIs that align with your business goals and needs. Collecting too much data can be overwhelming, so choose the most relevant KPIs.
At Beyond, we use KPIs not just to share data, but to engage our clients in conversations on the health of their business. We find that discussions about business performance help our clients to clarify if they are reaching their goals. Visit our Advisory Services Page to learn how we can use KPIs to help your business.