Key performance indicators (KPIs) are a group of quantifiable measurements that are used together to determine the long-term performance of a company. KPIs help gauge how a company is performing across key strategic, financial, and operational fields, and allow business owners and investors to see how well a company is performing against peers within its industry.
KPIs are a standard way to measure performance, but exactly which KPIs are measured varies between sectors and even competing businesses may choose to measure a different mix of KPIs as they may be targeting differentiated goals. Nonetheless, if you can see all important KPIs in one central dashboard then you should now how well a company is performing.
6 of the most important financial KPIs for any business
1. Revenue growth
A successful company is constantly growing its revenues, and whilst profits may vary depending in what stage of development the company is in, revenues should always be on an upwards trajectory.
Revenue growth is therefore a key measurement of success, and it is also relatively simple to track as a KPI. To calculate revenue growth, you subtract the one month’s revenue (A) from the current month’s revenue (B), divide the result by the first month’s revenue (A), and multiply it by 100 to turn it into a percentage. A positive figure demonstrates growth or a negative figure shows that revenues are on the decline and corrective actions should be implemented.
2. Revenue streams
If you measure the revenues coming in on both a per service and per client basis then it should be easier to determine which part of the business is the most lucrative and which clients are generating the most income, which should make it easier to decide the direction a businesses should take going forward.
For example, if a mechanic found out that they generated most of their revenue via offering new tires, and the clients spending the most money were SUV drivers then the mechanic may best be served specifically targeting SUV drivers and promoting sales of new tires in the future to boost revenues.
3. Revenue concentration
A healthy business has a broad revenue base, so that if one or two clients move elsewhere the company will continue to be profitable and it will not be more than a small bump in the road. In contrast, companies that generate the vast majority of their revenues from one or two clients are relatively fragile and may not be able to adapt to a new situation if one or both of those clients close or move.
To determine how much of your company’s revenues come from each client you simply divide the revenue of a customer by your total revenue and multiply it by 100 to get a percentage.
4. profitability over time
Even with strong revenue growth, unless you have as deep pockets as Uber if you are not making strides towards profitability then you will eventually run out of runway. Profit and loss reports are one of the oldest ways to track company performance and they remain as useful as ever. By subtracting a companies expenses from its revenues you can see how much profit the company has generated over the period.
In general, companies should look to increase profits, but if a company is spending a lot on marketing that may eat into profits for the current period but pay off down the line with an increase in regular income form the new customers, and so it can be quite normal for a company to make a loss whilst in the growth stages but these should always be temporary.
If a company continues to make losses month after month then it is critical for the company to try and cut some expenses, whether that is renegotiating contracts, moving to cheaper premises, or reducing the company headcount, and increase its revenues.
5. Operating Cashflow
Operating cash flow (OCF) shows the total revenue generated by a company’s daily business operations and it can be a useful way to gauge whether a company can maintain the positive cash flow required for growth or whether the company will need to look for outside financing to manage its outgoings.
OCF is calculated by adjusting net income for a variety of factors including inventory updates, changes to accounts receivable, and depreciation, and it can be compared to the company’s total capital employed to see whether the business can produce sufficient capital to keep its accounts in the black (positive).
6. Working capital
Working capital is the cash immediately available to a business, its short-term investments, and account receivable and denotes the liquidity of the company. The working capital KPI measures this against the company’s short-term financial obligations to see whether the company can stay in the black in the short term and is calculated by subtracting current liabilities from current assets.
Every company may have its own objectives, but the six KPIs above are important to all business no matter their sector or goals.