Have you defined your Key Performance Indicators, or KPIs? How do you measure progress as you work to reach your goals? KPIs help organizations to quantify their operations and can reveal longer-term trends as businesses meet their established KPIs or miss the mark. To be valid and useful measures of success, KPIs must be pre-defined and have a set target. Some of our favorite financial indicators include:
- Liability to Inventory Percentage %, which indicates your reliance on your available inventory for payment of debt—this is basically your organizational solvency. If sales slip for any reason, do you have sufficient liquidity to meet your obligations? A high liability to inventory ratio could reveal that you are stocking the wrong products for your market. The KPI that you establish to assess this ratio will help you to know when you need to take corrective action to mitigate your financial risk.
- Accounts Receivable to Cash Percentage, which tells you how quickly you can convert sales to cash. Having a short accounts receivable cycle requires an efficient credit and collection process. A KPI that sets an appropriate average collection period will tell you if your collection cycle is too long (because it’s too lax) or too short (because you really restrict credit issued to your customers). Finding the right balance will help you optimize your cash flow while not repressing sales.
- Gross margins comparison from year to year, which reveal overall performance over time. Are you profit margins up and down over time or are profit margins slipping? What is driving the declines or changes in profit margins? There are many factors that can affect profit margins—increasing competition, increasing costs of raw materials, greater transportation costs. Knowing how your gross margins compare from year to year will help you know when it’s time to adjust your other KPIs so that you are performing as well as possible.
SouthWare Excellent Series can help you evaluate your operations in light of your KPIs. The reporting and analytics tools that are part of SouthWare’s Business Intelligence package will help you track your business’ performance to your KPIs and will provide valuable insights—but only if you take the time to establish KPIs!