Navigate Better with the Right KPIs

By David Schleicher, CPA, Manager

From the baseball field to the boardroom, statistical analysis has changed various industries nationwide. With proper preparation and guidance, business owners can have at their fingertips a wealth of stats-based insight into how their companies are performing — far beyond the bottom line on an income statement.

The metrics in question are commonly referred to as key performance indicators (KPIs). These formula-based measurements reveal the trends underlying a company’s operations. And seeing those trends can help you find the right path forward and give you fair warning when you’re headed in the wrong direction.

Getting started

A good place to start is with some of the KPIs that apply to most businesses. For example, take current ratio (current assets / current liabilities). It can help you determine your capacity to meet your short-term liabilities with cash and other relatively liquid assets.

Another KPI to regularly calculate is working capital turnover ratio (revenue / average working capital). Many companies struggle with temperamental cash flows that can wax and wane based on buying trends or seasonal fluctuations. This ratio shows the amount of revenue supported by each dollar of net working capital used.

Debt is also an issue for many businesses. You can monitor your debt-to-equity (total debt / net worth) ratio to measure your degree of leverage. The higher the ratio, the greater the risk that creditors are assuming and the tougher it may be to obtain financing.

Choosing wisely

There are many KPIs we could discuss. The exact indicators you should look at depend on the size of your company and the nature of its work. KPI’s don’t necessarily need to be financial measurements. We often recommend having KPI’s on safety, quality, delivery, and costs. My favorite KPI is material margin dollars per total employee cost dollar. This ratio removes material costs from the numerator, which allows us to focus on the dollars we can control. Please contact me EMAIL DAVE if you have questions about  how to chose the right KPIs and calculating them accurately.