Are You Using Your KPI Tracker Wrong?

Are You Using Your KPI Tracker Wrong?

by Karl Neset

How well is your business doing? There is no way to know for sure unless you regularly monitor progress. That means you must have something to measure against, so you can plot trends and identify potential problems and opportunities. But what key performance indicators, or KPIs, should you use?

The Big Picture: Start Broad, then Refine as You Go

When a business is new, itโ€™s tempting to try to track everything. Thatโ€™s not a bad thing, to a point, because everything is new and needs looking after. So you might start with 20 โ€œmust haveโ€ measurements you revisit weekly or quarterly.

You want to compare business performance to your past history but also to forecasts and goals, to ensure your company has the resources needed to grow and also remain agile during unpredictable economies. For that, it also helps to know how your business performance compares to others in your industry.

This is where a CFO with experience can be helpful. Their guidance should be backed with insights from resources like the IBISWorld economic data and industry publications. Theyโ€™ll be able to help you identify leading and lagging indicators and other relevant benchmarks for your business.

For example, how does your current ratio compare to industry data? Is your cash flow ratio good (above average), normal, or weak (below average)? If the latter, why? Time passes quickly, so plotting the data monthly on a spreadsheet will help. Otherwise, if you arenโ€™t watching closely, negative trends can go unnoticed until itโ€™s too late. Or until youโ€™ve missed a golden opportunity.

Itโ€™s vital to monitor performance improvement trends and uncover the โ€œwhyโ€ behind them. As a CEO or business owner, itโ€™s helpful to have a trusted resource to tap into. If your company is growing, you can follow that lead and double down.

Over time, you will see that some of your original KPIs correlate so closely you can actually begin to consolidate your listโ€“fewer KPIs that deliver the same predictive picture more efficiently. Typically, a small to midsize business will wind up with 3 to 5, perhaps as many as 7 KPIs. Your CFO or fractional CFO can guide you through a process designed to pinpoint the most valuable KPIs as your business changes.

Financial Assessment KPIs

CEOs and CFOs should be tracking certain KPIs as they prepare and review monthly financials. Because it is so important to choose the right financial KPIs, this is another time when a smaller firm can benefit from having someone sitting in that CFO chair (even part-time). 

While working capital, profit margin, and debt to equity are generally considered the top 3 KPIs every business should track, there are actually several benchmarks you can use to sharpen your business performance picture.

1. Cash flow forecast

Cash is still king, so not having a cash flow forecast is risky. Most businesses donโ€™t need a full 13-week forecast, unless youโ€™re in high growth or a turnaround. That said, a 13-week forecast is critical for high-inventory, high-turn businesses. Others may get by with a monthly cash flow forecast, or your company might fall somewhere in between. Once you do a 13-week forecast, you can easily continue with it using new numbers, to get a true tracking picture of what hits your business and when.

2. Gross margin

You can build a โ€œtrend cardโ€ using profit and loss to plot average gross margin. If something trends downward for three months in a row, itโ€™s time to get concerned and identify the cause.

3. Days outstanding

What is your turn for accounts receivable, accounts payable, and inventory? Time is money. You can track total receivables that are 30, 60, or 90 days late or a percentage.

4. Liquidity (debt to equity) ratio

This is a good litmus test. You want to know:

  • Current ratio
  • Quick ratio (current assets less inventory). Itโ€™s best if your ratio is between 1.5:1 and 2:1, otherwise, your business will lose liquidity over time
  • Dollar difference (current assets divided by liability as shown on your balance sheet at month-end)

5. Revenue growth rate

Look at month over month and year over year. Whether revenue is going up or down, it is imperative to know why. You also want to measure and monitor working capital.

6. Market share

Itโ€™s not always possible to determine this, but looking at customer retention can be revealing, especially for B2B wholesalers.

7. Shipping and customer service

Order returns due to mistakes are costly, in dollars and reputation. What is going wrong? The same is true for customer complaints. Track volume, but also the reasons, so you can fix problems. Discuss weekly tracking data in sales and customer experience meetings. Owners and key leaders can tackle non-customer service issues.

8. Return on investment

Every business should track this closely, but itโ€™s even more important if investors are involved. The way a business defines this will likely be unique based on their situation.

9. Customer acquisition costs

This is an especially valuable KPI for companies in growth mode. It may take into account marketing or sales costs.

Donโ€™t Let Yourself Get Bored

Monitoring your KPIs is a lot like piloting a planeโ€“most of the time itโ€™s routine, but the critical trick is to catch any changes right away and take action to keep your business healthy and growing by correcting course or capturing opportunities.Full-time to too expensive? A fractional CFO may be your best solution CTA

Karl Neset

Karl Neset

Karl Neset is an accomplished professional offering over 20 years of expertise in improving organizational finance and operational processes. He serves as a solid foundation and knowledgeable advisor and manager, utilizing excellent leadership and communication skills to provide guidance and direction to executive leaders, governing boards, staff, and business partners. Karl effectively analyzes financial data, recommends improvements, executes financial tools, systems, and accounting measures that drive profitable performance, limits costs, and significantly improve overall profit margins and cash flow. He has been with Redpath and Company as Business Development Manager and Fractional CFO since 2022.