The key performance indicators (KPIs) and metrics I help companies develop are determined because they help that company monitor its specific strategy. However, regardless of your business model, industry, or unique selling proposition, every company needs to monitor financial metrics. While your business might adopt additional financial metrics, these are the top four financial KPIs that should be monitored by every company to be effective.
Often referred to as the “top line” because it’s the top line of the income statement, every company needs to watch how much revenue is generated by sales and business activities. When you look at revenue, it is important to understand how income has grown over time, which we refer to as the revenue growth rate. Additionally, you might want to break down overall revenue and look at revenue by product, region, services, customers, etc. so you can tell exactly what drives your income. An important aspect to check for is revenue concentration. You want to avoid having too much revenue coming from one customer or one area of the business. The advice, “don’t put all your eggs in one basket” is pertinent for your company’s income as well.
Profitability is another critical KPI to monitor for all businesses. The key metric here is net profit, which is the result when you take income minus your expenses—literally what’s left at the end of the month, quarter, or year. Also referred to as your company’s bottom line, net profit is a key metric. A good way to look at your profits is by evaluating your net profit margin. The net profit margin is the percentage of revenue that is left for net profit. A net profit margin of 10% is considered average; 20% high and 5% low although this varies by industry.
Liquidity is how much money you have available to e.g. keep your business going, weather a storm, or invest in new opportunities. A good metric to understand liquidity is a company’s working capital, which is the difference between current assets such as cash, stocks, accounts receivable, and inventories and the company’s current liabilities such as accounts payable. Ideally, you want to aim for a ratio between 1.2 and 2 to have a healthy business. Another way to look at liquidity is your cash conversion cycle (CCC) which is how long it takes to gain revenue from when you first make an investment. For example, if you invest in new equipment or a new product, the CCC would be how long it takes for you to get revenue in your bank account from that investment. Companies want to reduce their CCC for better liquidity.
Return on Investment (ROI)
Companies want to invest wisely—in endeavors that generate a big return to the company or what is called a return on investment or ROI for short. When you are tracking ROI, you are measuring how much revenue was created by a campaign, product, or program compared to how much it cost to create. For example, in marketing, a return on investment of five to one is considered strong (i.e. invest $1 to get $5 in return) while ten to one is an exceptional return on investment.
Additional KPI Resources
While every company should have key performance indicators to monitor sales, profitability, liquidity, and return on investment, there are many other financial KPIs that might make sense for your company to track. Check out a few of the options in my Key Performance Indicator (KPI) Library. When it comes to KPIs, please keep in mind it’s quality over quantity. It’s common for organizations to struggle to narrow down KPIs to only the most meaningful for their company.
Meaningful KPIs, combined with effective strategic planning, serve as essential navigation tools to help companies understand performance and how they are delivering to strategic goals. I’ve developed a KPI template—that I use with my clients in business and government—that can help you streamline the development of KPIs. This template is based on more than 25 years of experience facilitating the process for companies of all sizes and industries.
Although the term KPI is popular in business today, unfortunately, it’s often misunderstood. When companies simply adopt KPIs being used by other companies or don’t really understand them, they won’t be effective. Therefore, it’s important to not only understand how to use KPIs effectively, but how to develop the right ones that will lead your organization to success.
You can also see additional resources about key performance indicators on my YouTube channel.
Where to go from here
If you would like to know more about measuring HR effectiveness, check out my articles on:
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