Business Dashboards have to show business performance. These are the 9 Business KPIs that are a must have for any business. How many do you track?
Keeping track of business performance requires you to know how well you are performing in many different areas.
Business performance ranges from cash flow to liquidity and, finally, the capital. From a financial perspective, KPIs measure success in the short, medium, and long term. Each gives valuable insight into how your business is performing overall.
The main categories of financial Business KPIs are:
1. Cash flow
- Net profit
- DDO (Debtors Days Outstanding)
Poor cash flow is the undoing of around two thirds of businesses. For this reason, create a healthy cash flow position by chasing debtors, keeping DDO down, and also maintain a close eye on variable overheads.
- Debt ratio
- Quick ratio
- Current ratio
A strong position of liquidity also allows you to react in case of emergencies. Chasing debtors, keeping DDO down, as well as keeping Current Liabilities less than half the current assets will improve your position.
- Return on Assets
- Core capital
- Return on Capital
The long term view of any business is a return on investment. These KPIs reflect how well your business is performing as an investment. Robust long run profitability is key to high performing business. You should also keep a close eye on the value of assets on your balance sheet.
An explanation of each of these KPIs follows along with a suggested target. It’s important to remember KPIs targets are incredibly contextual, so you should deeply consider your targets based on your business. For example, profit margins of 10%+ are almost impossible to reach in some industries, yet essential in others.
1. Cash flow
A measure of the proportion of revenue that is left after all expenses has been paid. If the business makes $5.21 of net profit for every $100 it generates in revenue, this may indicate cost blowouts that require efficiency improvements.
Net Profit = Net Profit or Operating Profit / Revenue
Debtors Days Outstanding (DDO)
Debtors Days Outstanding (DDO) is a measure of the average number of days that it takes a company to collect payment after the sale. DDO is generally determined on a monthly, quarterly, or annual basis. It can be calculated by dividing the amount of accounts receivable during a given period by the total value of credit sales during the same period. Then multiply the result by the number of days in the period measured.
DDO = accounts receivable / average sales per day
Less than 60
Debtors represent the total amount of money all customers currently owe you. The general view is that debtors are not a great thing to have, but they are if you keep the DDO low by making sure they pay promptly. If you can, then debtors are a sign of a healthy pipeline.
>110% of 12 Month Average of Sales.
The debt ratio compares a company’s total debt to its total assets. It, therefore, provides creditors and investors with a general idea as to the amount of leverage used by a company. The lower the percentage, the less leverage a company is using, and the stronger its equity position.
Debt Ratio = Total Debt / Total Assets
Less than 20%
The Quick Ratio measures the availability of assets, which can quickly be converted into cash to cover current liabilities.
Inventory and other less liquid current assets are excluded from this calculation. The Quick Ratio is a measure of the ability to pay short-term creditors immediately from liquid assets.
Quick Ratio = (Cash & Money At Bank(s) + Accounts Receivable) / Total Current Liabilities
A quick ratio of 1 or more is considered ‘safe.’
A measure of liquidity. This measure compares the totals of the current assets and current liabilities. The higher the current ratio, the greater the ‘cushion’ between current obligations and the business’s ability to pay them.
Current Ratio = Current Assets / Current Liabilities
A current ratio of 2 or more is an indicator of good short-term financial strength. In other words, the current assets of the business should be at least double the current liabilities.
Return on Assets
A measure of how effectively the business has used its assets to generate profits. Return on Assets is a performance measure that is independent of the business’s capital structure. The higher the ratio, the greater the return on assets.
Return on Assets = Annualised Net Profit / Total Assets
Core Capital is the minimum amount of capital a firm should have on hand to cover the next two months’ liabilities. For this reason, it acts as a financial buffer that helps protect the firm against any high stress months.
Core Capital = Cash – Line of credit debt
2 x Total Operating Expenses
Return on Capital
Return on capital is a financial ratio that measures a company’s profitability and the efficiency with which its capital is employed. It is also a useful metric for comparing profitability across companies based on the amount of capital they use.
Return on Capital = EBIT / Capital Employed
Greater than 10%