KPIs for your business

KPIs – Key Performance Indicators. They aren’t a fad, and it’s not just jargon. KPI’s should be used by tech companies – that’s a myth, as KPI’s should be used by all businesses regardless of industry. They are the bedrock for measuring the success or health of your business. For a business owner, KPI’s are an important piece in a company’s analysis and direction. Without KPIs, you don’t know how well or poorly your business is performing. Where is your business headed in 2019? Do you know where to double down, or what to avoid next?

The most common ratios to include in your dashboard of KPIs should measure profitability, liquidity, leverage, and activity. They should also be simple, aligned, relevant, measurable, achievable, timely, and visible. We will touch on some popular KPIs, why they are important, and how the information can be applied for short-term operations and management and for long-term use.

Profitability: Gross Profit Margin

Indicates the total margin available to cover operating expenses and yield a profit. Additionally, also shows the proportion of money left over from revenues after accounting for the cost of goods sold.

(Sales-Cost of Goods Sold) / Sales

Why it’s important
Gross profit is an indicator of net profit, operating profit margin, net income, break-even, and earnings. This opens up possibilities for growth and improvements.

How to use short-term
Knowing your margin, whether it is high or low, can help you evaluate pricing, sales, sourcing raw materials, overhead, distribution, and branding.

How to use for exit planning
A healthy margin will attract investors and buyers. A history of steady GM shows the efficiency of an organization. It will create possibilities of how financial capital may or may not be used for reinvestment in staff, marketing, equipment, or real estate.

Liquidity: Current Ratio

Indicates the extent to which the claims of short-term creditors are covered by assets that are expected to be converted to cash in a period roughly corresponding to the maturity of the liabilities. This is also known as Working Capital Ratio

Current Assets / Current Liabilities

Why it’s important
This measures the ability for a company to pay short term and long term debts. A ratio below 1 (one), could suggest that the company does not have the resources to meet short-term obligations. However, in some industries, a ratio below one would be normal. If it is very high, the company has a lot of options for growth and may need help in managing the excess profits.

How to use short-term
Knowing your ratio will assure whether or not you can make payroll, pay utilities and loan payments. If you see a trend of your ratio hovering around 1.5 or better you may implement your plans for additional staff, new equipment or expansion. If it’s below 1 (one) you may want to consider reducing overhead.

How to use for exit planning
You want to be very aware of this ratio when considering exiting, inviting new shareholders or entertaining offers. To illustrate, here are some stocks to review. (We found the current ratios of these stocks at gurufocus.com.)
Apple(AAPL) has a current ratio of 1.3 All-time high over last 10 years of 3.39
Stitch Fix (SFIX) current ratio of 2.07 All-time high over last 3 years 2.93
Stryker Corp. (SYK) current ratio of 2.02 All-time high over past 14 years 4.76
Twitter (TWTR) current ratio of 4.61 All-time high past 9 years 12.48

Leverage: Debt-to-Assets Ratio

Measures the extent to which borrowed funds have been used to finance the firm’s operations.

Total Debt / Total Assets

Why it’s important
This ratio identifies the total assets that are financed by creditors.

How to use short-term
Having a lower debt to assets ratio should reflect excess capital to again expand operations, staff, upgrade facilities or equipment, or to expand into additional business lines.

How to use for exit planning
Generally, having more assets than debt can reduce the risk to the buyer and make the deal more attractive. But in some cases, if assets are too high, tax liabilities may strain the deal. The higher the ratio, the higher the risk. If the ratio exceeds 1 (one) the company may be on the brink of bankruptcy or default. However, if debt is managed properly it can benefit tax liability or purchase price.

Activity: Accounts Receivable Ratio

A measure of the average length of time it takes the firm to collect the sales made on credit.

Annual Sales / Average Accounts Receivable

Why it’s important
This ratio shows explicitly if there is an issue with collecting money.

How to use short-term
You can also draw inferences concerning customer service, pricing or marketing for new business for a better customer base. This ratio can also be applied to evaluate trends in progression (continue to do what is successful) or regression (retool and implement more efficient accounts receivable policies).

How to use for exit planning
This ratio tracks history to show buyers the trends in efficiency of your operations, and success in collections. This will also give the buyer a comparison against the industry and show the earning potential for the future.

There are innumerable ratios for tracking and evaluating business operations and financial health, but these are the most common. You may discover other ratios that are a better measuring stick for your business or industry. Any financial ratio that is used should illustrate strengths and opportunities for improvement in an organization. They may also chart unusual fluctuations and gauge performance. The KPI you choose to implement should be helpful to analyze, forecast, set goals, and track progress. You can also use the findings of KPIs to serve as a critical element of establishing internal controls. If you are playing the long game this will provide history, progression, and benchmarks for current stakeholders and for an exit strategy.

We would love to help you with budgeting, planning and implementing a successful exit strategy. Please visit our website or call us at 412.278.2200 today to start your plan today!

By Wilke & Associates, CPAs