What are Key Performance Indicators (KPIs)?
Key Performance Indicators (KPIs) are quantifiable metrics used to evaluate the success of an organisation in achieving its objectives. These metrics are tailored to specific goals and objectives and help businesses gauge their progress towards reaching these targets. KPIs provide valuable insights into various aspects of business performance, such as sales growth, customer satisfaction, operational efficiency, and financial health. By tracking KPIs, businesses can identify areas of strength and areas that require improvement, enabling them to make data-driven decisions and optimise their strategies for greater success. Ultimately, KPIs serve as crucial tools for monitoring performance, fostering accountability, and driving continuous improvement within an organisation.
What are the calculation methods for business KPIs?
Here, we share 25 different KPI calculations you can use in your business to help you measure your performance.
These are grouped below in 4 key areas of business (click on images below to access and download KPI calculation worksheet packs).
How do I choose the right KPIs for my business?
When it comes to measuring business performance, identifying the right Key Performance Indicators (KPIs) is crucial for success. While every business is unique and may prioritise different metrics based on its goals and industry, certain KPIs are universally valuable in providing insights into overall performance and facilitating informed decision-making.
Our Top Ten KPIs to track are:
(NB: If calculations are not provided below, you will find them in the download packs above)
Lifetime value of a client (LTV)
LTV shows the total financial benefit you can expect from a client over the course of your entire relationship with them.
Cost of client acquisition (CAC)
The metric tells you the average amount your business is spending to acquire a new customer/client.
Combined LTV:CAC
To calculate LTV:CAC = (Customer Lifetime Value) / (Customer Acquisition Cost). This metric is useful for assessing the overall effectiveness of your customer acquisition strategy and determining whether you are generating enough value from your customers/clients to justify the cost of acquiring them.
Sales growth rate / revenue growth rate
Measures the ability to increase revenue over a fixed period of time.
Gross profit margin
Measures how much each dollar of sales is left as profit after deducting cost of goods sold.
Operating margin
A profitability measure indicating how much each dollar of sales is left after both costs of goods sold and operating expenses are considered.
Break-even point (BEP) or sales required to hit target profit
Calculate the point at which total revenue equals total expenses – at the break-even point, there is no profit or loss.
Working capital required by $100 of additional revenue
Working capital is the amount of money that a company needs to cover its day-to-day operational expenses and to fund its current assets, such as inventory and accounts receivable.When a company generates additional revenue, it often needs to invest in additional working capital to support that growth. The amount of working capital required to support each dollar of additional revenue is an important metric for businesses to monitor, as it can help them understand the amount of cash they need to have on hand to support their growth.
Inventory turnover / stock turnover
The average number of times that inventory/stock sells in a given period.
Return on capital %
Return on capital (ROC) is a financial ratio that measures how efficiently a company generates profits from the capital it has invested in its business. It represents the percentage return that a company earns on the total capital employed, including both debt and equity. The formula for calculating return on capital is: ROC = (Net Operating Profit after Tax) / (Total Capital Employed). A higher ROC indicates that a company is generating more profits from the capital it has invested in its business, while a lower ROC suggests that the company is less efficient in using its capital to generate profits.
Why is it important to track KPIs in business?
- Tracking Progress: KPIs allow business owners and your management team to track progress towards your goals and ensure that you are on track to meet your objectives.
This helps to identify any issues that may be preventing you or your team from achieving your goals and allows individuals to take corrective action.
Decision-making: KPIs provide valuable insights that help you make informed decisions. By analysing KPIs, business owners and management teams can identify areas where they are performing well, and areas where they need to improve.
Performance Management: KPIs are an important tool for managing employee performance. By setting specific KPIs for each department or employee, businesses can track their performance and provide feedback on areas where they are performing well, and areas where they need to improve.
Accountability: KPIs provide a framework for accountability. By setting specific targets and tracking progress towards those targets, owners and management can hold employees and departments accountable for their performance.
How often should KPIs be reviewed and updated?
The frequency of reviewing and updating Key Performance Indicators (KPIs) depends on several factors, including the nature of your business, the stability of your industry, and the pace of change within your organisation. As a general guideline, KPIs should be reviewed regularly to ensure they remain relevant and aligned with your business goals. For some businesses, this might mean a monthly review, while others may find quarterly or even annual reviews sufficient. Itās essential to strike a balance between staying responsive to changing conditions and avoiding unnecessary disruption caused by overly frequent changes. Additionally, updating KPIs should occur whenever there are significant shifts in business strategy, market conditions, or operational priorities. By maintaining a consistent schedule of review and updating, you can ensure that your KPIs continue to provide valuable insights into your business performance over time.
How can Walsh Accountants help?
The significance of tracking KPIs in your business cannot be overstated, as they serve as vital indicators of performance tailored to your unique goals, priorities, and industry landscape. Identifying and monitoring the most relevant KPIs regularly is essential to ensure your business stays on course towards achieving its objectives.
If you find defining your goals and selecting appropriate KPIs daunting, our Walsh Accountants Focus Advisory team is here to simplify the process for you. By partnering with us, you gain clarity on your businessās direction and uncover actionable insights to drive efficiencies and foster growth.
Contact us today for a personalised discussion tailored to your needs and aspirations. Let Walsh Accountants be your guide in unlocking your businessās full potential to thrive.
