Your basic financial statements report what has happened in the past – these are lagging indicators. Those numbers are certainly important, but they only tell you what has already happened. If you don’t like the results, there’s nothing you can do to change them. However, to impact future results, you must also identify Key Performance Indicators (KPIs) to focus on the activities happening right now – leading indicators.
Impacting Future Revenue through KPIs
You generate new customer leads, and a percentage of those leads are won; that’s your acquisition rate. A certain percentage of your current customers naturally leave for various reasons; that’s your attrition rate. Combine those with your existing customer base, and you have your total number of customers. If you know the frequency of your customers’ purchases and the average sale per customer, you could predict the gross revenue that will end up on your financial statements. Don’t like what you see? Finding ways to change your volume of leads, your win rate, your attrition rate, the frequency of customer contact, or the average value of each sale would each impact your future revenue. Each activity has an associated KPI that can be measured. Measuring KPIs at the activity level allows for processes to be modified while there’s still a chance to improve results.
There are hundreds of KPIs you could monitor. I only mentioned five examples: volume of leads, win rate, attrition rate, frequency of customer contact, and average value per sale. You must focus on KPIs that represent the critical activities in your business.
Here’s where you start:
Businesses are typically organized into four main performance areas – finance, operations, customers, and people/workforce.
- Finance includes all activities related to the business’ financial aspects, such as accounts receivable, accounts payable, payroll, reporting, banking, and compliance.
- Operations includes all activities related to the development, production, and delivery of a product or service, including manufacturing processes, inventory management, quality control, order processing, service delivery, shipping, and receiving.
- Customers includes all activities relating to the acquisition and retention of customers, including marketing, sales, and customer service.
- People includes all activities related to hiring, training, managing, growing, and developing people.
Identify your key goals and challenges for each of the main performance areas of your business. Less is more; too many KPIs to measure and monitor will become burdensome and detract from your key goals and objectives. Select your KPIs carefully based on the size and the culture of your business and the challenges or issues you are trying to impact.
Improving Cash Flow through KPIs
Let’s go through another example. In the area of finance, you may need to improve cash flow. Let’s assume your business doesn’t get paid at the point of sale, but instead invoices customers and receives payment later. Your KPI could be Receivable Days (this is the average number of days a company takes to collect payments).
Current Receivable Days: 65
Goal: 50 days
Measuring and monitoring this number won’t change your results unless you also identify the activities that impact your cash flow from this perspective and measure and monitor those. In this example, that could be:
- the time it takes to get the billing out, and
- accuracy of billing statements.
So, your goals could be to get the billing out within 24 hours and to have 98% accuracy on billings. You would need to measure and monitor these underlying activities, in addition to the overall Receivable Days.
Selecting Your KPIs
Each business is unique, so it’s important to map out the activities that drive your business and then focus on selecting measures around the most critical activities. Identify your primary goals and challenges, determine the underlying activities, and then start measuring and monitoring those KPIs to improve your future results.
Need help getting started? Reach out to TDT today for more information on one-on-one consulting engagements or our “DIY” video course to help you identify, measure, and monitor KPIs.
Courtney DeRonde, CPA is Co-Managing Partner at TDT CPAs and Advisors. Proactively helping clients achieve better results is TDT’s purpose. To carry that out, Courtney uses real-life experience from her work in firm leadership and her business knowledge from 18 years of serving clients to help small businesses succeed. She is recognized among others within the profession for her expertise as she presents at various conferences and seminars.