Every business is focused on results. Such a result would be, for example, an annual increase in profits, an increase in the number of clients and their satisfaction with the services that you provide.
Now we are talking about KPIs (key performance indicators). What are they?
These are indicators, usually quantitative, which show your company’s performance. They are needed to compare the results achieved with the previously set goals.
KPIs can be easily measured with enterprise analytics software.
Key performance indicators are often used instead of Enterprise analytics and vice versa. But I’m afraid that’s not right. The two concepts are correlated as a result and a process. The first shows what organizational goals were achieved over a certain period, and the second shows precisely how it was done. Indicators are unique; there can’t be many of them. And there can be many analytics results.
One such data set could be information on employee payroll.
So, you can save information about the payment of salaries, the number of deductions, taxes paid, and pension deductions for previous periods by the software. It will make it easy to calculate and make payroll payments, avoiding the possibility of creating fake pay stubs.
This data, combined with the rest of the financial metrics, will help make decisions about the effectiveness of the business.
KPIs come in financial, customer metrics, and process performance metrics.
To achieve an excellent company’s financial health, you should monitor several of these KPIs from the profitability, solvency, efficiency, and liquidity categories daily.
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1. Accounts Receivable.
It is the money that other companies or individuals owe you for goods or services already sold or delivered. How does it arise? Many contracts may have specific payment terms that allow the customer to pay in the future. This procedure can be compared to a short-term loan.
You can see the receivable as a current asset on the balance sheet. Typically, this payment is due in the short term. If the counterparty is delinquent, you must file a claim for voluntary performance or a lawsuit in court to enforce collection. In this case, you can also calculate and claim fines and penalties stipulated in the contract or applicable law.
It is an essential indicator of the company’s liquidity, as it shows the ability to cover its short-term obligations without raising additional money.
2. Accounts Payable.
It is the amount of short-term debt your company owes for received goods and services. Accounts payable are calculated based on your invoices and written down in your general ledger. To not incur losses, the payment of accounts payable must be controlled. Internal controls should ensure that fraudulent invoices or duplicate invoices are identified.
It is also very convenient to use software to control the delivery of goods, receipt of money, and expenses.
Keep in mind that invoices must be paid on time. The possibility of going to court has a mirror effect. Your counterparty can also demand payment of debts through the court. In that case, the amount is likely to be increased.
3. Sales growth.
It isn’t easy to assess the importance of this indicator. It shows how the revenue generated by the sales of goods over a certain period has increased. Business owners can introduce bonuses for employees in a percentage of sales. It will generally increase their motivation to improve the company’s financial position.
Sales growth will show whether your business is overgrowing or moving slowly toward liquidation.
Don’t aim for a sales level higher than everyone else in your industry. That’s impossible. Identify your direct competitors and be a level above them.
A distinction is made between organic and advertising sales growth.
The first is caused directly by using your internal resources. The second is the result of the participation of other entities. It is achieved through mergers and partnerships.
Sometimes it is not possible to achieve high organic sales, and the plan is achievable only through the involvement of third parties.
How do you calculate the sales?
There is a particular mathematical formula:
(Sales for the current period – sales for the previous period) / sales in the prior period ×100 = Sales growth rate.
All of the values in this formula are available to you from your accounting and tax records.
To increase sales, you can use well-known sales growth strategies.
- Capture the local market. We understand the natural desire of businesses to enter the international market as quickly as possible and gain brand recognition. But such a rush can be fatal to your development. Dedicating resources to mastering a large-scale goal will not work if you don’t capture the local market.
- Take advantage of complimentary product opportunities. Get the customer to repeat their purchase. To do this, expand the range, and offer gifts and discounts.
- Train your employees. Sales representatives will benefit you much more if they use modern sales techniques. Provide opportunities for your employees to attend training that will bring them new skills.
4. Debt-to-Equity Ratio
This indicator is also called the “risk ratio.” It boils down to the ratio of a company’s total debt on its financial liabilities to its total equity value.
If this ratio is high, we can speak of a so-called “levered firm.” Such a firm can count on a favorable outlook if it is fast-growing. Here we should remember the previous parameters.
If the business is in decline, there is the possibility that it will not pay its debts.
When the ratio is low, we are talking about a company that seeks to finance itself solely with its funds fully.
So what does total debt include?
These are the different types of financial liabilities that have to be repaid:
- loans (short-term and long-term)
- notes payable.
Why is a high ratio of total debt to equity dangerous?
If a company has extensive debt that is not covered by its capital, any losses will be critical for the company. Debt repayment would become too expensive, and the company could go bankrupt.
And a low Debt-to-Equity Ratio is also not a good indicator for a growing business.
In other words, the golden mean is essential to us again.
Businesses in different industries can choose other KPIs to track.
Financial KPIs will show the most productivity over time and in combination with other KPIs. Only then can they also be compared to the performance of other companies in a similar market.