Growing Your Business

What These 5 KPIs Can Teach Us About Our Business

by
Evelyn Hsu
on
2/10/2016
What These 5 KPIs Can Teach Us About Our Business

Every good business has Key Performance Indicators (KPIs) that help them understand their operations model. Although there are a number of KPIs that can be applied, these five do a very good job of pinpointing the elements of your business.

Why Do We Need KPIs?

Key performance indicators are standards in which to evaluate progress. They help you meet your established goals and objectives. A KPI has certain criteria – they must have quantifiable measurements; be precisely definable; clear and specific; established prior to the measurement; achievable; results-oriented; relevant to future planning; and reflect the critical success factors of the business.

The right KPIs will not only help evaluate performance, but will demonstrate those areas that need the most attention.

Gross Profit Margin

The gross profit margin measures the profit made on each dollar of sales made before expenses. This is calculated by taking the difference in revenue, production costs once you subtract overhead, payroll and taxes and divide it by revenue.

Net Profit

Net profit measures financial performance and represents the number of sales dollars that remain after all the taxes, interest, operating expenses, and preferred stock dividends have been deducted from total revenue. This can also be viewed as net earnings. The calculation for this is total revenue minus total expenses.

Net Profit Margin

This KPI measures how you generate profit based on each dollar of revenue you acquire. This will help determine the effectiveness of your business. This is an important KPI because it measures profitability, and assists in making long – and short-term decisions that will impact the bottom line, future and viability of the company.

Accounts Receivable Aging

Accounts receivable identifies the uncollected charges you have on your books. Accounts receivable aging measures how long it takes to collect these charges. This is important to the health of your accounts receivable processes, which ultimately determines your cash intake and flow.

Revenue Growth Rate

The revenue growth rate indicates how much the sales or income are increasing. To calculate this, you must take the revenue of the current year, divide it by the total revenue from the previous year and that will give you the most accurate figure. Monitoring this on a consistent basis will help you see when the company starts to plateau, giving you an opportunity to make changes to improve revenues or sales.

Financial KPIs are the strongest elements of measuring company performance, and are needed to assess the viability of the organization. These will give you a definitive snapshot on the overall health of the business and whether or not you need to perform financial CPR, change your services, or dial up the level of service your organization is providing.

Once you establish the use of KPIs in your business model, you will be able to determine patterns of spending, loss and anticipate trends based on the information you gather. They are essential management tools that assist in reviewing company performance based on projections and targets. Knowing how to track your progress is key in moving forward.

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Evelyn Hsu

Evelyn Hsu

Ivy Accounting, Tax & Advisory is a Certified Public Accountant (CPA) practice based in Miami, Florida. Evelyn Hsu is the principal in charge of the accounting and auditing practice and is CPA licensed in the state of Florida. She graduated from the University of Miami with a Master's degree in Accounting. Her company has provided a wide range of accounting and tax services to businesses and individuals for many years. She specializes in services to individuals, to small businesses and in representation before the Internal Revenue Service. Evelyn can assist you with all of your tax preparation needs.

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