There’s a quote people like to attribute to Albert Einstein (it actually belongs to William Bruce Cameron, a sociologist, who, perhaps, wasn’t as meme-worthy as Einstein). Anyway, without further ado: “Not everything that can be counted counts, and not everything that counts can be counted.”
CEOs can be buried under an avalanche of data. Virtually everything in an organization can be measured. That doesn’t mean that leaders have the time – or mandate – to wade through it all. Key Performance Indicators (KPIs) weed out the things that “count” for a successful business strategy. And we can weed that down further. Which financial KPIs do leaders really need to access?
KPIs that Count
KPIs are quantifiable snapshots, if you will, of your performance. The financial KPIs that are critical for financial health include:
- Sales. Look at sales by different product lines and compare to your budget. Also compare sales this month to this month last year and year-to-date. A company which sells health care insurance, for instance, might look at the number of people enrolling in different plans and compare that to previous months, years, and YTD.
Gross profit margin by line of business. Again, you would compare this to the budget, last year, and YTD. A marketing business, for instance, might sell consulting and strategic services. That’s one line of business. Another might be search engine optimization services, and a third might be social media campaigns. What are the gross profit margins on each of these lines of business?
If CEOs differentiate between the lines of business on their financials, they can see the profitability of each, and they can adjust pricing as needed. If the lines of business are all lumped into one bucket it can mask, for instance, that one line of business is profitable and another is a dog. Now, you may need that dog because it’s a loss leader, but you have to know that going in.
Industry comparison. Leaders need a target at which to aim. If the gross profit margin for a company is 25% and the industry is at 47%-50%, for example, that CEO needs to start examining why there is such a big difference. Is it pricing? Is it the cost of goods sold? What’s going on, and why isn’t the company hitting the industry averages?
Liquidity. Liquidity represents the ability to convert assets into cash with minimal loss. How old are accounts receivable? Accounts payable? Inventory? KPIs related to liquidity tell leaders how well they are managing their cash.
Cash. Speaking of which. How much do we have? What is our working capital situation? How much can we access on our line of credit, if we do have a line of credit? Managing cash is one of the most essential functions of the financial function of a company..
Productivity. Companies that are heavily-people oriented need to look at productivity measures. As an example, we work with a number of service companies whose revenue is generated from hours billed by employees. These firms want to know their billable hours by client, and the percentage of billable time in total by employee. Whether the company is in the business of sorting mail or manufacturing windows, it should track the number of units produced by employee.
Debt covenants. If companies have debt covenants, they will want to keep close watch on these ratios. What is the interest coverage ratio? Equity ratio? Loan life coverage ratio? There are a number of liquidity and solvency ratios that are important to keep on top of.
Operational measures. Many KPIs are industry-specific. For example: a law firm is, of course, concerned with billable time. They might look at the percentage of their attorneys’ time that is billable vs. non-billable, or the ratio of attorneys to non-attorneys.
These KPIs matter; they offer the CEO an accurate picture of the financial health of the business. The primary goal is not to look back but to take the opportunity to use this data to make smart business decisions for the future.