Week 3: Healthy Business Series: Which KPI Is Best for You?
To my chagrin I find that I am a young man stuck in an old guy’s body. Over the years the issues that my doctors paid attention to changed. As a child, they measured how fast I was growing taller. Later my gym teachers counted how many sit-ups I could do for the President’s fitness program. Now the docs measure how fast my belly is growing now. Or is that my tailor?
As my body matured, the critical items to monitor changed. This will be true for your business as well. What matters most will change depending on the needs and maturity of the organization, economic and financial conditions, and many other external and internal factors.
Thus, some of the key performance indicators (KPIs) that you monitor today are unlikely to be the critical indicators in the future. Here are some ratios that many of our clients monitor closely.
Current Ratio: current assets/current liabilities
Net Working Capital: current assets – current liabilities
Return on Sales: net income/net sales
Gross Profit: net sales – cost of goods sold
Return on Assets: net income/average total assets
Inventory Turnover: cost of sales/average inventory
Receivables Turnover: net credit sales/average accounts receivable
Days Sales Outstanding: 360 days/receivables turnover
Total Asset Turnover: net sales/average total assets
Debt Ratio: total liabilities/total assets
Times Interest Earned: EBIT/interest expense
It is said that to a hammer, everything looks like a nail. Thus sales managers tend to focus on Return on Sales, Inventory Turnover and Gross Profit. Financial managers often focus on Current Ratio, Receivable Turnover, Debt Ratio, and Times Interest Earned. Other functional managers look at other things, but you get the idea (I hope).
Which KPI is best for you? It depends on your role, your firm’s maturity and marketing position, and many other factors. There is no single correct answer to that question.
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.