The Importance of Measuring and Monitoring Business KPIs
“If you can measure it, you can manage it,” states the old business axiom. But what, specifically, should you be measuring when it comes to your business’ performance?
The answer, according to a growing number of management experts today, is KPIs, or key performance indicators. These are quantifiable measurements that help define and gauge progress toward your company’s most important goals and success factors.
What’s On Your Business Dashboard?
The growing awareness of the importance of measuring and monitoring KPIs has made the business practice of “dashboarding” increasingly popular. In the same way that an automobile’s dashboard has lights and gauges that let drivers know about potential problems, you can create a business dashboard that consists of the KPIs that are most important to your company’s success.
No two business’ dashboards will look exactly the same, because every business must determine which are its most important KPIs. This will depend on the type of organization, the particular industry, and the company’s specific goals and objectives, among other factors.
KPIs are generally divided into two broad categories: financial KPIs and non-financial KPIs. Financial KPIs are common ratios and metrics such as the current and debt-to-equity ratios, accounts receivable (AR) and accounts payable (AP) days, days sales outstanding (DSO) and inventory turnover. Non-financial KPIs may include measurements of things like employee turnover (human resources), unit reject rates (manufacturing), client retention (management) and new customer acquisition (marketing).
It’s important to note that KPIs have limited value when they are viewed in isolation. Instead, KPIs should be benchmarked and compared to previous time periods, which will enable you to look for trends possibly revealing potential problems early while you still have time to remedy them. Keeping a close eye on inventory turnover, for example, will give you an early warning if certain items start moving off your shelves more slowly.
Also compare your KPIs to the averages in your industry to see where you stand against similar companies. RMA’s Annual Statement Studies provides financial performance data broken out by industry and categorized by NAICS codes. Visit www.rmahq.org for ordering information, or see if your local library or industry trade association has a copy you can borrow.
It’s important to set goals for the KPIs you decide to monitor and measure. An inventory turnover of four times per year is common in many industries, for example, while a debt-to-equity ratio of 2:1 or less is viewed favorably by many lenders when looking at a company’s financials.
What Might a Dashboard Look Like?
So how might a business dashboard help you measure key financial gauges in order to monitor critical areas of business performance? Here are a few examples:
- Cash Flow - If AR days and/or DSO are lengthening, this might reflect a slowdown in collection of accounts receivable — and foreshadow a future cash flow crunch.
- Inventory - If inventory turnover is slowing down, you might want to adjust your purchasing strategy to avoid having too much inventory sitting idle on your shelves — and wasting valuable cash.
- Growth financing - If your company needs to borrow funds to support growth, lenders will want you to participate in this need; basically having “skin in the game.” Keeping an eye on your debt-to-equity ratio is a good place to focus your attention.
Where Do You Start?
So which KPIs should you focus on first? To answer this question, go back to your company’s mission statement and your primary goals and objectives for the upcoming year. From these, you can start to narrow down which KPIs are critical to meeting your most important business objectives.
Right now is an excellent time to conduct this exercise as you put the wraps on 2013 and finalize your business plans for the new year. For assistance from City National Bank, give us a call at (800) 773-7100 or Contact Us request that a Relationship Manager contact you.