Week 2: Healthy Business Series: What is a KPI?
What is a Key Performance Indicator (KPI)? KPIs are almost always a ratio.
If you drive a car, you look at KPIs all the time. Miles per hour. Revolutions per minute. Half full of gasoline. Heading 30 degrees east of north. These indicators give you valuable information that we take for granted. They help us to drive safely and give us instant feedback. If, for example, my car’s tachometer read 7300 rpms, the speedometer 40 mph, and the drive indicator was set at “D”, then my engine is running way too fast and the automatic transmission doesn’t seem to be shifting correctly. Simple, quick, valuable feedback to tell me to get to a mechanic before something blows up.
Your company needs feedback to run efficiently, and we call that feedback KPIs. Generally speaking KPIs compare figures derived from your accounting system.
A current ratio compares your firm’s current assets to its current liabilities. It is a measure of your company’s short-term bill paying ability. If the current assets equal the current liabilities, then the ratio in 1. Anything smaller than a 1 is automatically a red flag, but what if your current ratio is 2? Is that good? Maybe, and maybe not. It depends on your industry. If you are in a field with a lot of capital equipment, like a refinery or a farm, then a 2 might be fantastic. If your business is a cash flow business, such as a business services firm, then a 2 may not look so good.
You see, it isn’t about the number itself. The key is to compare your number to other, similar firms’ numbers. Are you beating your competitors, or are they beating up on you?
Where do you go to find out if your KPIs are better or worse than your competitors? Ask your banker, or ask your CPA. They have access to the information you need, and they want to help you. Or go to the library and ask the reference librarian for information about financial ratio relevant to your industry. Or contact Washington BBI. For a small fee we can look up your NAICS code (i.e., your line of work), and can provide you with a report containing the KPIs for your business.
Peter Busacca, MBA
About: Since 2001 Washington BBI has helped owners of small and mid-sized firms in Western Washington to build benchmark performance, create sustainable profits, exit plan, and buy or sell firms.