Your KPIs and Your Business: Which Key Performance Indicators Matter the Most

One of the most important things to understand is that while all KPIs provide valuable insight and information into how far a business has come and where it might be headed, there is no “one size fits all” approach to tracking your progress as an entrepreneur. Only by first determining what your goals are will you know which KPIs you need to zero in on and pay attention to. Within that context, the insight they provide can help you make better, more informed decisions moving forward.

Generally speaking, there are a few KPIs in particular you’ll want to consider within the context of your organization. These include:

• Revenue Growth Rate, which is a solid indicator of how quickly your business is growing.
• Daily Active Users to Monthly Active Users. This indicator helps track the stickiness of your product, and hence how much value your clients see in what you are offering.
• Activation Rate. A measurement of how many visitors are engaging with a product like a website or a mobile app.
• Burn Rate. This helps immediately identify the negative cash flow of your company.
• Gross Profit Margin - Gross profit is calculated by subtracting your business’s cost of goods sold from its revenue. Once arriving at your company’s gross profit, divide it by its revenue.

Tracking Success Helps Create Success

During a series of recent discussions with financial professionals, many industry veterans echoed these ideas. Elizabeth P. Davies of Taxes Untangled, Inc. said, “while the KPIs that should be tracked depend on the business, the most common by far is Accounts Receivable and Payable Turnover.” She explained: “cash is KING, and without it, the business will close. Therefore, A/R collection has to be a top priority.”

Cliff Davis of Davis & Langford CPAs expanded on the idea that different KPIs are more relevant for different industries. “Labor as a percentage of revenue is a key indicator for service businesses,” he said. “Day sales outstanding in AR measure the effectiveness of your collections. Higher numbers here are really bad for the cash flow of your business.” At this point, it’s important to remember that cash flow troubles are one of the major contributing factors to small business failures in the first place.

Allen Lenth of Executive Tax Solutions said that he usually focuses on a few distinct KPIs with his own clients. “Obviously, sales are important, but also cost of goods sold, number of prospect contacts, payroll, owner distributions and variable costs,” were ones that he singled out, he said. “At the macro level, we like to compare these numbers over a three-year period. At the micro level, I like to see my clients work on six-week plans and tweak expenses along the way for the best results possible.”

In the end, one must acknowledge that while it is certainly possible to set up and monitor these KPIs yourself on an ongoing basis, that isn’t necessarily something you want to do. You’re talking about information that is changing rapidly, but that is also directly related to the long-term health and welfare of the organization you’re trying to run.

If you try to track all of this information on your own AND devote as much of your attention as possible to running a business, the chances are high that you won’t actually be very good at either scenario. Instead, it is always recommended to partner with a financial professional who understands both your business and your industry. That way, they can wade through all the data your KPIs are collecting and quickly provide you with the information you need to know.

Not only will this help make sure you don’t miss anything important, but it will also make sure that the foundation you’re currently building on is as strong as it can possibly be.

Lee Reams II, writes for CountingWorks, an accounting news and advice website. Reach him at [email protected] or on LinkedIn. 

 

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