Understanding Business Metrics and KPIs

Understanding Business Metrics and KPIs

Key performance indicators provide insight into the financial health of your business. Before you can track key performance indicators, however, you need to have accurate financial reporting.

There are three key areas where key performance indicators (KPIs) come into play: sales, operations, and safety.

We’ll review two KPIs in each area that will help you manage your business more efficiently and effectively.

Sales Key Performance Indicators

Most people don’t think that sales metrics are associated with accounting, but they are. As long as you’re tracking the numbers and you’re increasing accountability, you’re doing accounting.

Two KPIs you should track in sales are: (1) sales funnel metrics and (2) new bookings.

When identifying the basic building blocks for sales, ask yourself: what is the first thing that happens in your sales funnel? Is it a call? An inbound lead? Is it a marketing piece or a networking meeting? A seminar that your company is holding? A Facebook lead or Google ad?

For this example, let’s say your initial stage of the sales funnel is number of calls. Your sales team makes 100 calls each week and 10 of those calls turn into appointments. And out of those 10 appointments, you’ll get 5 proposals. From those 5 proposals, you sell 2 products.

This means that for every 100 calls, you sell 2 products. Therefore, the key piece to track is the 100 calls. How many calls are you making? Did you make 100 calls this week? If so, you know you sold 2 products. So, tracking that first building block–that very first step in the sales process–is a critical key performance leading indicator of your company’s future revenue.

The second key performance indicator in sales is new bookings. Both KPIs are important. If you’re tracking these 100 calls and you’re not tracking the associated bookings, you won’t know if, in fact, 100 calls still lead to 2 sales.

As time goes on, things change in your business. There are different marketing efforts that work, and different sales people might not be as effective as others. So, you want to track sales funnel metrics, and you also want to track bookings on a monthly basis.

Indicators of Operational Effectiveness

The first key performance indicator for operational effectiveness is gross profit margin.

To calculate gross profit margin, first determine gross profit. How much did I sell my products/services for and how much did it cost me to deliver my product or service? The difference between those two things is gross profit. Next, take the gross profit and divide it by the total revenue. That gives you a percentage–your gross profit percentage for that period.

You want to track gross profit percentage every month because it should be staying relatively consistent, ideally ticking up just a little. If you see it start to trend downward, it means that it’s either costing you more to provide that good or service, you’re not selling as much or you’re not selling at the right price.

Gross profit margin is the heartbeat of your organization and is determined by what you do to deliver your product or service and how profitably you are doing it.

The second key performance indicator in operations is operational effectiveness. Measure this by looking at total administrative costs and dividing by total number of employees.

This tells you how much you’re spending per employee to keep the environment and the culture the way it is today.

That number should be slightly decreasing over time as you gain efficiencies. As you get better at the administrative and operational side of your business, the dollars you spend per employee should actually go down as you become more efficient.

Safety Key Performance Indicators

Are you getting safer or weaker as a business? One metric that is critical to take a look at is something called a current ratio. A current ratio is calculated by dividing current assets by current liabilities.

Your current assets are the things that are going to turn into cash in the next 12 months. Your current liabilities are things that are going to take cash out of your business in the next 12 months.

With the current ratio, you’ll be able to figure out whether you’re running out of cash. This is the most critical thing. Without cash, you’re out of business.

Most importantly, this gives you a look three to nine months in advance and will tell you if you are in danger of running out of cash. Watching your current ratio will guarantee that you don’t go out of business because it gives the ability to plan ahead.

The next metric of safety is something very simple–net equity. Net equity is the last line on your Balance Sheet and it tells you whether your business is getting stronger or weaker.

If your business is getting stronger, you’re more likely to withstand an unforeseen downturn in your sales, a loss of a customer, or worse–a downturn in the economy (something that you can’t control).

In your business, you want to constantly be getting safer, so watch net equity to ensure it increases over time.

Recap

There are many different KPIs that may be relevant to your business. The six shared above are generally relevant to most businesses. If you watch all six of these key performance indicators, you’re going to have a better business and greater peace of mind. You will gain more control over your business, have better accountability, and drive profitability. In short, you will be in a position to achieve your professional goals.

Sale key performance indicators:
Sales Funnel
Bookings

Operations key performance indicators:
Gross Profit Margin Percentage
Administrative Costs per Employee

Safety key performance indicators:
Current Ratio
Net Equity

Share:

Sorry, comments are closed for this post.