Know Your Numbers- A Guide to Tracking Key Performance Indicators (KPIs)

Welcome to our weekly episode guide on Tracking Key Performance Indicators (KPIs). Each week, we will post an episode offering advice on how to effectively track and utilise KPIs to enhance your business performance. In this episode, we will cover five essential financial KPIs that every business should monitor.

Running a business is like navigating uncharted waters. Just as a captain needs to know their ship’s position, speed, and direction, business owners must understand their company's performance. Key Performance Indicators (KPIs) measure performance against goals, offering insights into financial health, efficiency, customer satisfaction, and overall success.

This guide explores the importance of KPIs, discussing which metrics to track and how to interpret the data. Whether you're a business owner or financial professional, understanding KPIs is vital for success.

Episode 2: Financial KPIs for Performance Evaluation (Part 2)

1. Revenue per Employee

What is the Revenue per Employee ratio? Revenue per employee is important for determining the productivity and efficiency of employees working in the business.

How to calculate: = Revenue ÷ # of FTEs

Why is it important? For many businesses, staff costs (ie. wages, salaries and employee benefits) are the largest expense. During any business downturn, it’s important to monitor the productivity and utilisation of employees.

2. Breakeven Margin of Safety

What is the Breakeven Margin of Safety? The Breakeven Margin of Safety represents the gap between the revenues and the breakeven point. This is the amount by which revenues can drop before losses begin to be incurred.

How to calculate: = Total Revenue – Breakeven

Why is it important? A higher margin of safety indicates that the business is better positioned to handle a decline in revenues. Understanding the quantum of risk here is useful for planning.

3. Accounts Receivable Days

What are Accounts Receivable Days? A measure of how long it takes for the business to collect cash from customers. A shorter time to collect from debtors will have a positive impact on cash flow.

How to calculate: = Accounts Receivable x Period Length ÷ Revenue

Why is it important? Many of your customers may have been adversely affected by the economic climate. So it’s important to monitor any upward trend in this metric, while carefully managing the collection of amounts owing from customers. Any increase in this number indicates that it’s taking longer to collect amounts due from customers. Successful cash management requires monitoring all the elements of the working capital cycle. It’s important to understand how to optimise the working capital cycles so that the operational aspect of your business is cash flow positive.

4. Accounts Payable Days

What are Accounts Payable Days? A measure of how long it takes for the business to pay its creditors. A stable higher number is generally an indicator of good cash 13 management. A longer time taken to pay creditors has a positive impact on cash flow. However, an excessive lengthening in this ratio could indicate a problem with the sufficiency of working capital to pay creditors.

How to calculate: = Accounts Payable x Period Length ÷ Total Cost of Sales

Why is it important? Optimising your working capital during this time is imperative, but it is also important to maintain positive ongoing business relationships with existing suppliers. The excessive lengthening in this ratio could threaten the continuity of service from suppliers.

5. Inventory Days

What is Inventory Days? A measure of how efficiently the business converts inventory into sales. A lower number of days is generally an indicator of good inventory management. A shorter time holding inventory has a positive impact on cash flow.

How to calculate: = Inventory x Period Length ÷ Cost of Sales

Why is it important? A high result may indicate overstocking, conversely, a low result can mean there is a shortage of inventory. It is important to track your inventory so you don’t purchase more or less than you need.

Understanding and tracking these five essential financial KPIs is crucial for any business aiming for sustainable growth and profitability. Regular monitoring of these metrics empowers businesses to make informed decisions, adapt proactively to economic changes, and maintain a competitive advantage. Join us in our next episode as we further explore these KPIs, providing insights to navigate your business toward continued success.

Contact us today: info@gallagherkeane.ie