We’ve reached the middle of the calendar year. So how are things going for your business? Conversationally you might say, “Pretty good.” But, analytically, can you put a number on how well you’re doing — or several numbers for that matter? You can if you choose and calculate the right types of key performance indicators (KPIs).
There are a wide variety of financial KPIs for small business to choose from. Here are four that can give you a solid snapshot of your midyear position:
1. Gross profit. This figure will tell you how much money you made after your manufacturing and selling costs were paid. To figure this calculation, subtract the cost of goods sold from your total revenue.
2. Current ratio. This ratio will help you gauge the strength of your cash flow. To figure this calculation, divide your current assets by your current liabilities.
3. Inventory turnover ratio. This is a great calculation to see how to improve inventory management control. This ratio warns you ahead of time if certain items are moving more slowly than they have in the past. It also will tell you the turnover rate on these items. To calculate this ratio, divide your cost of goods sold by your average inventory for the period.
4. Debt-to-equity ratio. This ratio will measure your company’s leverage, or how much debt is being used to finance your assets. It’s calculated by dividing your total liabilities by shareholder’s equity.
Widely known ratios are not the only options for KPIs. You can make up your own and apply them to any area of your business.
For example, let’s say the company’s goal is to improve its response time to customer complaints. A KPI on customer assessment might be to provide an initial response to complaints within 24 hours, and to eventually resolve at least 80% of complaints to the customer’s satisfaction. You can track response times and document resolutions and eventually calculate this KPI.
As another example, say your business wants to improve its sales prospecting techniques and closing rate on sales leads. Its KPI could be to convert 50% of all qualified leads into customers over the next six months with the goal of raising this percentage to 60% next year.
Notice that these types of key performance indicators are both specific and measurable. Just saying that your company wants to “provide better customer service” or “close more sales” won’t produce a sound KPI.
Midyear is the perfect time to stop, take a breath and objectively assess your company’s performance. This way, if things are really going well, you can determine precisely why and keep that momentum going. And if they’re not, you can figure out how you’re ailing and adjust your budget and objectives accordingly. Our CPA firm can help you choose the KPIs that will provide the information you need, as well as help you apply that data to good business decisions.