We live in a time of data overload. Because we have too much information, we have a cloudy view obstructing our reality. Figuring out which Key Performance Indicators ("KPI") clearly show you are running the company well is critical. Here are the most important KPI to signal you are doing it right (or wrong).
Carol Coughlin, President of Bottom Line Growth, penned a powerful article in Business Leadership that business managers and owners should mount in their offices. She cuts through the clutter and answers, " Which financial KPIs do leaders really need to access?"
1) Sales. Create a budget each year by month. Some businesses are seasonal and dips in client activity are expected. At Marlin Steel, automotive manufacturing engineers take long vacations during plant shut downs. We have no chance for landing big material handling basket orders for a Toyota or GM plant in July or August. Check each month's variance from your budget to see if things are going as planned. Are you exceeding your targets or declining? Better to catch these variances early in the year so you can make adjustments fast. Using this KPI will insure you do not lose a whole year when the sales KPI is flagging. On the flip side, our KPI is surging up now so we are hiring mechanical engineers to keep up with the demand and aggressively buying robots.
2) Gross profit margin by line of business. Watch how each product line is performing by profitability. Understanding which department is performing well is imperative to identifying where you should deploy more cash to nurture your strong businesses. Some business lines are low margin and will always be low margin. By watching this KPI, we can make sure that the low margin product lines never become losers and sink the company. Closing out these loser departments fast may save a whole company and the KPI will get you to be aware early.
3) Industry comparison. Compare your business with your competitors. Illuminating good or bad differences can be analyzed and you can change course so you can be more competitive. For example, Marlin Steel has always shipped more $ per square foot than its competition because we are so lean. We optimize our floor space so that the landlord loses (we pay less rent since we have a small foot print) and our client wins so they do not have to pay for wasted space.
4) Liquidity. How fast can you turn your assets into cash? Are your client's debts to you going to be paid fast? On-time? Is it time to shake up your collections department? Are your vendors screaming at you? Is your inventory turning fast or stale and headed to the dumpster? Monitoring your liquidity closely will be a critical early warning system to the health of your company.
5) Cash. Carol shared "Managing cash is one of the most essential ...financial function(s) of a company." I believe it is the MOST essential function of management. Making sure you have cash to run the company is your most important KPI.
6) Productivity. It is vital you "track the number of units produced by employee." This will make sure your company never gets too fat--burdened with labor you cannot afford. If this ratio is thrown off--alarm bells should be going off. On the flip side, if your clients are disappointed with your service levels and your units produced per employee is very high, that may mean you need to add extra staff so you continue to enchant (thanks Guy Kawasaki) your clients so they keep reordering.
7) Debt covenants. Banks impose covenants on companies that have to be closely watched. If the bank sees covenants breached, they will get troublesome and may even call your loan. Keeping banks happy is critical so that you can run your business and not deal with rear guard actions. Make sure you are monitoring your interest coverage ratio and other metrics your banker is watching carefully. If you are sensing problems on this front, reach out to your banker and discuss it with them so that they see you are being transparent and not letting problems fester. Maybe you can negotiate a waiver or loosen some requirements. A relaxation of covenants is more likely if you go to the banker with these problems first.
8) Operational measures. What are KPIs that move your specific business? Each industry has different KPIs that matter. Figure out yours and watch them like a hawk.
Bottom line, as Carol said, "these KPIs matter; they offer the CEO an accurate picture of the financial health of the business. The primary goal is not to look back but to take the opportunity to use this data to make smart business decisions for the future."