It’s the”key performance indicators” that are important to monitor — financial and non-financial.
Financial KPIs mostly come from the accounting system. Examples are your monthly earnings, gross profit percentage, and inventory turnover. Your financial KPIs are equally as good as the accuracy of your accounting system.
Non-financial KPIs mostly come from sources apart from your accounting system. Examples are your conversion rate, website traffic, and email readers.
You don’t need to measure all the information. Rather, select three to seven monetary and non-financial KPIs. Measuring a good deal of will lead to paralysis by analysis.
Your KPIs should ride on your targets. They should also have real significance. If you have this information, how can you use it? If you won’t use it, don’t measure it.
By means of example, if you want to raise earnings by 60 percent, quantify your earnings. If you’re concerned about the cost of merchandise sold, measure the actual costs and gross profit percentage. If you would like to grow website traffic, measure the weekly and monthly visits. If are concerned about working expenses, measure them in dollars and as a percentage of earnings. KPIs should drive your decisions and measure your company’s performance.
Amounts or Percentages?
Merchants sometimes ask if they need to monitor numbers or percentages. The short answer is both.
When using financial KPIs, it’s normally better to use proportions. If the proportions have a massive change from month to month, then analyze the actual numbers on the financial statement and in your own accounting system.
If your historical gross profit is 55 percent of earnings and in January 2015 your gross profit dropped to 51 percent, this may be an issue. To determine if this is a singular event or an ongoing problem, analyze the detail in the accounting system. After investigating further, you might remember, for example, that in January you discounted a few inventory. This diminished the sales price, resulting in lower gross profit margins. It is isolated to January since you stopped the decrease on January 31.
Conversely, when using non invasive KPIs, you probably will use actual numbers, but there may be a need to use proportions. It all depends on what you will need to measure.
Website traffic, for example, would be a real number. But in the event that you want to maximize your conversion rate by 5 percent, measure that in a percentage.
Compare to Past Data
Quantify your company’s KPIs against your own historical data instead of industry averages.
Track your KPIs with time. I suggest 13 months. This will enable you to compare your present month (February 2015) to the exact same month last year (February 2014), along with the weeks in between.
Using 13 months serves multiple purposes.
- It’s long enough to discover tendencies — ideally, advancement.
- It shows your existing history — improvements and declines.
- It is not too far back, as your business is most likely always evolving.
I am not fond of measuring a business on industry averages. You don’t have to be average. Your business differs. An industry average may imply that you could improve in some areas. However, you always have to work to improve your own performance, not an average.
While financial statements are important, they should not be the only information you rely on.
Determine your key performance indicators based on which you want to improve. Review these KPIs before having a look at the financial statements. The KPIs should paint an image of your company and, consequently, will create the financial statements easier to understand.
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