With 2019 well underway and Christmas a distant memory, now is the time to look forward. A new year with new possibilities stretches out in front of you and your business. This time of year is full of good advice – social media, the news paper and radio shows are all talking about making 2019 the best year ever.
I encourage you to think like that, to put your best business foot forward. In doing so, I’d like to make sure that you plan accordingly. There is an old saying that I really like and it’s particularly relevant at this time of year – ‘What gets measured gets done’.
If you are setting business plans or have set them already, I’d like to recommend that you include some key financial performance indicators (KPIs) or metrics in your business planning.
We work with clients on KPIs and what we have found is that looking at these KPIs regularly – be it monthly, bi-monthly or quarterly, it keeps you, the business owner focused. It’s so easy to get distracted and KPIs keep you on track.
So what exactly are KPIs?
KPIs are a small number of metrics that you and your team agree to measure which informs you of how your business is performing. While you may measure lots of metrics on a daily basis, KPIs are more strategic in nature. They are your goals for success. Monitoring them and analysing them and their results will help you realise if you are going in the right strategic direction or not and identify areas of improvement.
5 KPIs to Monitor Regularly
1. Working Capital KPI
Cash that is immediately available is known as working capital. The working capital KPI gives you a picture of your business’s financial health. It analyses how your available assets can cover your short-term financial liabilities.
It is calculated by subtracting your current liabilities from your current assets. It is a very meaningful and immediate KPI to measure and keep track of.
2. Current Ratio
The Current Ratio KPI assesses the solvency of your business. It is a key metric when it comes to the credit worthiness or credit rating of your business.
Current ratio and working capital KPIs are similar in that they use the same metrics. However, where working capital subtracts current liabilities from current assets, the current ratio divides the total assets by current liabilities.
By dividing your assets by your liabilities, you can asses how well your company is positioned to meet its financial obligations over time.
3. Revenue v Target
Every business should project or plan the upcoming year’s revenue. This is based on past performance, resources, the market and customer demand. Revenue can be overall for the company and if you have lines of business or product lines, then revenue for each department or line can be projected.
It’s important to track differences between actual revenues and projections – you can identify areas for improvements, assign more or less resources to a product line or department and make informed decisions.
4. Expenses v Budget
This is similar to the above KPI. If you have budgeted for a certain amount of expenses, but don’t monitor the actual expenses, then you could be over spending and this needs addressing. Similarly if you are not spending what you projected to spend, that could influence the performance of your business or product line.
5. Accounts Payable & Receivable Turnover KPI
Accounts payable turnover indicates the rate at which you can pay your suppliers. Accounts receivable informs you as to the rate at which you collect what is due. So this is two KPIs in one but it’s important to know both figures together.
Both turnover figures are incredibly critical. If your accounts receivable rate is too long and your accounts payable rate is too short, then you could have an issue with cashflow.
Both turnover metrics should be compared against previous periods and as soon as there is any discrepancy in either, it should be immediately improved upon.
In summary, there are many more KPIs that we work directly with clients on, however, monitoring these five KPIs regularly will increase the performance of your business.
If you’d like to discuss anything in this article, please get in touch.
AG Associates is an accounting practice that specialises in affordable accounting and payroll solutions for the SME business owner. It’s new service Clarity combines online book-keeping with offline accounting to provide an instant snap shot of how a business is doing right now
AG Associates is an accounting practice that specialises in affordable accounting and payroll solutions for the SME business owner. It’s new service Clarity combines online book-keeping with offline accounting to provide an instant snapshot of how a business is doing right now.
For further information please contact Angela at Unit 11, Eastgate Way, Little Island, Cork, 021 482 4723 or firstname.lastname@example.org.
AG Associates Accountants
11 Eastgate Way, Little Island, Cork
021 482 4723