Why KPIs Are More Important than Cliffs Notes Were in High School.

By Rich Bond

If you’re like most business owners, you want to have control over your company finances but not spend a lot of time reviewing the financial results or grilling your staff. That’s a tall order.

KPIs (Key Performance Indicators) are great because they can help you quickly and easily get the information you need without wading into the weeds of the financial statements. KPIs are like getting the Cliffs Notes for a brutal book like David Copperfield (which my wife loved and I thought was complete torture). Most business owners are as excited about dissecting and discussing their financial results as I was about reading Dave Copperfield.

When I took over my family’s business, the first year of going over the financials each month was almost like a food fight. My father, brother, and I all talked about something different. We finally agreed I would come up with a one-page summary of the previous month, which was a customized set of KPIs.

After that, we were able to have productive meetings of 15 minutes or less. We had the financial statements for the month but rarely spent any time going over them, as the one-page summary clearly laid out whether the business was moving ahead or not. The monthly statistics were a better indicator of the health of the business than the financial statements.

KPIs are useful because they can serve as an early warning alert system. Some KPIs don’t necessarily tell you things have gone off track, but they do suggest when you need to do some investigation. Some of the KPIs that fall into this category area:

  1. Gross Profit Margin
  2. Orders or Order Backlog (for companies with a longer order fulfillment).
  3. Headcount
  4. Operating Profit Margin

There are other KPIs that allow a CEO to manage the finance function without studying a complete set of financial statements. They include financial metrics:

  1. Days Sales Outstanding (Accounts Receivable)
  2. Accounts Payable
  3. Inventory Turnover
  4. Cash Flow (which may be the most important)

A KPI review should be done each month. In well run companies, the KPIs are distributed on the 2nd business day of the month and the financials on the 5th business day. If the KPIs are fine, then there is no real reason to do an in-depth review of the financials more frequently than on a quarterly basis. The KPIs should be distributed to the management team so the president or CEO can reach out to the appropriate person if s/he needs more information or detail.

Do you use KPIs? If so, which ones? I’d welcome the chance to talk with you about how the right CFO or Controller can establish an easy way to track your business’s health. Email me at richard.bond@bondandcompany.com.

 

 

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