Key Performance Indicators
Key performance indicators, or KPIs, are financial and non financial statistics that can be tracked and reported on to determine business performance against budgets, targets and prior periods. They assist management in the making of decisions within the business as they have agreed targets of what “good" looks like.
Here is an overview of some suggested KPIs that might be relevant or helpful to your business:
GROSS PROFIT %
Gross profit is calculated as the sales price less the costs associated with that sale. The gross profit % is then this figure divided by the sales price multiplied by 100 to give as a percentage.
For product based businesses, monitoring this allows visibility over performance month on month, on how sales and offers have impacted margin and if increased direct costs (ie postage, packaging etc) are being correctly factored into the sales price.
If your product mix is very varied with low and high margin products then you may wish to have this reporting on a more detailed level by department or range.
STOCK DAYS
Stock days are the average amount of time that stock is held within the business. It gives an overall picture of whether the stock holding is reasonable or not and should be looked at together with lead times for getting stock delivered. For example, if you have 50 days worth of stock but can get stock delivered in a week, then you are holding too much but if you have 50 days of stock and it takes 75 days for stock to be delivered then you are potentially under stocked.
As well as this high level of detail, stock should be reviewed on a SKU by SKU basis to help identify any lines that are slow moving or short of stock etc. This granular level of detail can help with decisions around discounts and sales as clearing old, slow stock may be needed but you wouldn't want to offer a big discount on your best selling lines.
DEBTOR DAYS
Debtor days are the average amount of time it takes your customers to pay you. If your business is in the retail sector then this won’t be applicable but for any business that offers payment terms, being able to see if these are being adhered to is important as late payment can massively impact your cash flow.
Ensuring you have clearly stated payment terms, that your bank details are clearly detailed on your invoices and that your late payment policy is communicated and enforced as necessary will all help. If you have persistent customers who are late payers look at moving to payment in advance or stage payments etc.
CREDITOR DAYS
Creditor days are the average period it takes your business to pay its bills. If you know all your suppliers offer you 30 day terms and your average period to pay your suppliers is coming out at 15 days then you are paying well ahead of terms. If this is a conscious business decision then great, but if your own cash is tight then it’s time to review this and stretch those payment periods so that you are making the most of the terms you are being given. However if you are taking 40 days to pay then you are extending your terms quite significantly which may cause issues with the relationships you have with your suppliers.
ROAS (RETURN ON AD SPEND)
ROAS is the income you generate from the ads you run. If you spend £100 on ads and generate £300 of income then your ROAS is 3. However, this may be generating you income, new customers and brand awareness but is it generating you profit?
If your gross profit is 50% then that £300 of income is £150 of profit and then taking off the cost of the ads of £100 means you've generated £50. So those ads have still had a positive impact on your cash and profitability.
But I do believe that ad returns need to be reviewed at this more detailed level to ensure you are getting a return. Although there are also other impacts of ads that aren't necessarily giving an immediate financial gain (brand awareness, customers to your newsletter, social media followers etc).
AVERAGE ORDER VALUE AND LIFETIME ORDER VALUE
If you are an online retailer, then being able to see what your average order value can help determine where to position free postage or any special offers etc. And being able to see lifetime order value (ie how much a customer has spent over the years) can help you determine customer retention and loyalty and also determine what you are willing to spend to gain customers.
SOCIAL MEDIA STATS
Social media stats can be helpful to understand how your marketing is performing but platforms change and can be fickle at times, so comparisons can be complex and not necessarily as meaningful as you might like.
SALES/STAFF COSTS
If you are a rapidly growing team being able to check that sales/staff costs is staying consistent can help you determine if you have the right staff in the right place. You do need to take into account that it can take a few months for staff to bed in but you would be wanting to ensure that if you are adding significant costs in that your income and profits are growing to cover these.
CURRENT RATIO AND ACID-TEST RATIO
The current ratio looks at your current assets (so stock, debtors and bank/cash) as a ratio to your current liabilities (supplier balances, HMRC balances, credit cards, loans due within one year). If this ratio is less than one then you may have liquidity issues and be struggling to pay your bills as and when they fall due.
The acid test ratio is essentially the same as the above but removes stock from the current assets figure as this is not “readily convertible to cash” meaning you need to sell it and be paid for it before you have cash that you can use to pay your bills. If this ratio is less than one then you will be having issues with paying suppliers on a timely basis and possibly bouncing from time to pay arrangement to time to pay arrangement with HMRC for your VAT etc.
Because these ratios require accurate figures for your assets and liabilities it's best to speak with your bookkeeper or accountant for help in ensuring these are correct before calculating them.
The above are just a few examples of KPIs you could use within your business and what is relevant to you will vary depending on your business and what you do etc.
Rachael