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Why KPIs Are Important: 3 Vital KPIs Your Business Must Measure

Have you ever wondered how to measure your business’s performance? Where do you start to measure? 

The thing is, you can’t know what you improve if you don’t know what to measure. Or even how to measure. 

KPIs, otherwise known as Key Performance Indicators, are the best way to help you understand key metrics about your business performance. 

But how do they work? And how do you use them to your benefit?

Here’s what KPIs involve and how you can start to measure your business performance more efficiently. 

Why KPIs?
Key Performance Indicators (KPIs) are
What KPIs need to be
How to choose KPIs suitable for your business
KPIs you must track 
The Bottom Line

Why KPIs?

When you go to the doctor for a routine check-up, there are certain things your doctor checks you for. 

There are certain metrics for measuring your blood pressure. There are specific metrics that are used to measure your blood work. Those things are KPIs. Well, KPIs for the medical industry.

In similar ways, there are certain metrics (KPIs) that are used to assess the performance of your business

What Key Performance Indicators (KPIs) are

Key performance indicators (KPIs) refer to a set of quantifiable measurements used to gauge a company’s overall long-term performance. KPIs specifically help determine a company’s strategic, financial, and operational achievements, especially compared to those of other businesses within the same sector.

So, to simplify it further, KPIs are: 

  1. Metrics – They can include anywhere from net profit, gross profit, debt to equity ratios to metrics that are more specific to certain industries over others.
  2. Industry-specific – For example, you won’t expect a cafe to track how many users are users are visiting their website and match it against their total sales in store. Rather it makes sense for a cafe to monitor cost of food and wages as a percentage of total sales in their KPI trackers.
  3. Factors affecting bottom line – Whether you’re a small business or a large entity, KPIs can help you drill down on factors that drive your profitability. It can help you figure out what changes you need to make to improve your bottom line.
  4. Unique to your business – Although no two businesses will drill down on the exact same KPIs, the idea remains that figuring out those KPIs help businesses measure the most important metrics.
  5. Helps you look at the big picture, so you make better decisions – Looking at different KPIs will give you more perspective, helping you make strategic decisions based on the data you have now acquired.

KPIs also need to be: 

  1. Relevant – If the KPIs you are measuring are not relevant to you, your business or your industry, then it really doesn’t end up helping you with much. This might sound obvious, but you’ll be surprised how much this gets ignored. 
  2. Balanced – Your KPIs should help you measure your business performance for both the short term and the long-term.
  3. Understandable – People making the decisions in your company need to be able to understand the KPIs you are tracking.
  4. Shared – Those who are looking at the KPI’s need to understand why particular KPIs are important to the business.

How to choose KPIs suitable for your business

Some of the things to consider include:

  • Your industry
  • Your business life cycle
  • Any unique circumstances
  • Your long and short-term goals
  • Your sales process – whether you operate purely online or have a traditional brick-and-mortar store

 If you are not sure of what KPIs to focus on and which ones are important for your business, having a chat with your bookkeeper or CFO can help you focus on the right KPIs.

KPIs you must track for your business

Every business will have various KPIs depending on their unique business needs. However, there are a few key financial KPIs that are important to track for almost any business, in any industry. They include: 

  1. Net Profit – Net Profit is one of the most simple and effective measures of your business’ success. 

Routine looks (monthly or quarterly) at your profit and loss statement can help you get valuable insights and identify trends. This can then help you develop strategies for those times during the year when you experience slumps in your bottom line.

It can also help you get a bigger picture of where your business is headed, and help you monitor where your cash is going. If that isn’t enough, it can help you track expenses so you can focus on lowering them. 

  1. Accounts Receivable Value – One of the biggest factors impacting cash-flow is the incoming cash coming in for the services you provide. If payments aren’t coming in on time, your cash flow can be detrimentally affected. Your ability to be prompt on your own financial commitments and payments will be hindered. 

Not tracking your Accounts Receivables would make it difficult for any business to realize outstanding invoices. Keeping up and following up on your invoices on a routine basis ensures all your revenues are coming in on time. 

Other relevant Accounts Receivable ratios include Accounts Receivable Turnover and Average Collection Period

  1. Revenue by service – Depending on your business, you may have a wide range of services provided to your clients. Whether it’s a cafe selling a variety of meals or a web design agency that has various services. It’s always a good idea to track which services are bringing in the most revenues for your business. 

Businesses often make the mistake of tracking all revenues as a whole. But if you track every source of revenue individually, you are able to drill down on the group of services that are most profitable for your business.

All in all, it will help you decide which services to expand, and which of them are worth cutting your efforts down on.  

The Bottom Line

Regardless of what your business function is, it’s always important to have:

  1. The right software 
  2. The right bookkeeper

Without the right software, tracking your KPIs appropriately can be difficult. An easy-to-use software like Xero is a great choice for many small to medium-sized businesses. 

But a good sword is only as good as the warrior that uses it. Such is the case for these softwares. Without a competent accounting professional, even the best softwares won’t do you much good. 

Hence you need a good firm on your side to help you accurately and report on your KPIs. With the right professionals at your arsenal, you’ll be able to make the best business decisions overall. Effectively tracking your sales growth, revenue growth, and overall performance.

If you’re looking to add a professional eye to help your business, get in touch with our competent team at run[Accounting] today!