From balance sheets to income statements and from cash flows to retained earnings, financial statements are essential to any entity. Evaluating financial activities means using these financial statements to unveil where a company is, how it compares to past successes, and possibly where it has the capacity to go in the future. As a business owner, leaning on financial statements to make decisions is commonplace.
Often complex and cumbersome, financials typically speak to overarching matters of an organization’s financial status. What is missing in these documents, however, is a picture of business operations and day-to-day activities. Taking a look at financial statements fails to unearth some of the most critical aspects of keeping a company afloat, especially with their focus on the present. As such, it is important to look beyond these statements to truly measure company successes as they relate to future endeavors.
Today, we are going to dig past financial statements to readjust our mindsets on something more practical: key performance indicators (KPIs). Now, KPIs are certainly not a new idea. Yet they seem to be neglected by many of the most savvy and successful business owners.
Our goal is to remind these entrepreneurs of just how valuable the right KPIs can be to position an organization to succeed this year, next year, and beyond.
Measuring Success Strategically This Year
To reiterate, financial statements are significantly important to the function of any company, but when it comes to day-to-day operations, KPIs take the cake. So, what KPIs should you be focusing on in your organization? How does the industry as a whole play a role in measuring your individual company success? Does your competition have a major impact on internal decisions?
These questions are important to ask, and to answer. End of year numbers are not the only way to assess a company’s success, KPIs must be applied year round to ensure that your business is on the right track. The following are some of the most essential KPIs to not only measure internally, but to also compare to industry standards:
- Employee turnover rate
- Inventory turnover
- Pre-tax income, in relation to percentage of sales
- Average revenue per client/customer
- Percentage of revenue growth
- Gross profit by product and/or service line
- Monthly site traffic
- Salaries of C-suite executives
- Net profit margin by client/customer
- Current and quick ratio
- ROI on research and development
- Client/customer acquisition ratio
The above KPIs are an excellent way to measure the successes and failures of your organization as a whole. Plus, they will likely reveal some of the more imperative actions that need to be taken to keep the company moving in the right direction. It is advisable to evaluate KPIs on a quarterly, or even monthly, basis to take an accurate temperature of the organization.
By shifting focus from financial statements to KPIs, business owners are able to see their companies in a different light, typically illuminating a number of valuable insights.
At Ellrich, Neal, Smith & Stohlman, P.A., we understand that successful results often hinge on the most trustworthy, thorough valuation of a business or other enterprise. That is why we emphasize continuing education and professional depth among our partners and staff. We are mindful of the complexities and nuances in valuing closely-held businesses, and bring our expertise to bear in each business valuation engagement. Contact us today to learn more!