KPIs - What are they and should I care?!
KPIs are Key Performance Indicators and help to give you an understanding of how your business (or any other business) is performing and allow you to compare businesses. If you are using them internally to measure performance, then you can see trends month on month and have targets for where you would like the figures to be. If you are using them to assess another businesses performance, then you need an understanding of the business sector to know what is good, bad or indifferent.
Not all KPIs will be financial, especially if you are using them to monitor your own business then you might want to use non-financial targets and goals as well.
Gross profit percentage
This is calculated as gross profit / turnover x 100%.
What counts as a “good” gross profit % all depends on your business sector, for wholesale you would expect to be getting a 50% gross profit % figure, but other businesses may work on a high volume sales model whereby they need to sell lots and lots to get the profit and then this percentage will be low. Whereas a luxury goods brand may sell few items but for high margins.
If you sell products, then stock days is a useful ratio to look at as it gives you an indicator of how much stock you have in terms of how long, on average it will take you to sell.
It is calculated as stock / cost of goods sold x 365
(based on annual purchases)
So if you had £10k of stock but only purchased £50k over a year then you are holding stock for, on average, 73 days. Now, if you can get goods delivered to you within a couple of days then that’s too much stock and that is tying up cash unnecessarily. But if you manufacture your stock and it takes 90 days to make something then you run the risk of running out ..
This is the average amount of time it takes for you to get paid.
It is calculated as trade debtors / sales x 365
(based on annual sales)
If you offer terms of 14 days but it takes, on average, 40 days to get paid then you need to get better at credit control and getting your customers to pay on time. If they pay in 10 days then go you!
This is the average amount of time it takes you to pay your suppliers:
It is calculated as trade creditors / cost of goods sold x 365
(based on annual purchases)
If you are paying your suppliers in 7 days (on average) but you know that they all offer you 30 day terms then you are their favourite customer! But slow down – they offer you the credit, so take the time to pay! The money is better in your account after all.
Working capital cycle
The working capital cycle is the amount of time from goods coming in to receiving the cash from customers for selling them and is calculated as:
Stock days + debtor days – creditor days
The shorter then number of days, then the less working capital a business needs as it’s moving stock and converting it to cash more quickly.
Liquidity ratio’s look at a businesses ability to pay it’s debts as and when they fall due .. how solvent the business is in effect. You tend to know yourself how your business is doing but it is particularly useful to look at this if you are looking at other businesses figures.
There are two ratios here:
Current ratio which is current assets / current liabilities
Quick ratio which is (current assets – stock) / current liabilities
There are two ratio’s as stock is harder to convert into cash as it has to first be sold (it becomes a trade debtor) and then it has to be paid for. In general you would want to see a quick ratio above 1.
Points to note
If you are in retail then debtor days will be virtually nil – maybe 3 days for the card machine company to pay you but that’s not considered a risky debt that won’t be paid.
If you are looking at your figures on a monthly basis then use monthly sales and purchases figures and 30 days instead of 365.
Whether you want to look at your ratios and KPIs is up to you but sometimes they can help you spot trends or problems within your business before you pick up that cash isn’t as free and flowing as you would like it to be.
Of course, there are other factors to consider when looking at your own business:
Marketing data – social media statistics, newsletter opens and click throughs, website analytics, abandoned cart statistics
Employee satisfaction and turnover
Look at what is important to you and your business and then work out how to track and monitor that too.