What in the World are KPIs?
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What in the World are KPIs?

What in the World are KPIs?

February 20, 2019 | Read Time: 5 Minutes


Huberty clients hear our advisors use the term “Key Performance Indicators” or see the acronym “KPI” written in the service descriptions on our website. However, not everyone is a CPA, so what exactly is a Key Performance Indicator and how does it relate to your financial outlook?

Key Performance Indicators, which we will refer to as KPIs from here forward, provide focuses for strategic and operational improvements, establish bases for decision making, and help owners focus their attention to the areas of their business that require it the most. Tracking and comparing KPIs allows managers to determine long-term plans and fix short-term problems. By utilizing KPI data, business owners can take a proactive approach to their operations and finances for both their short and long-term goals. KPIs not only provide information about what happened in the past but can also help inform leaders about what the future might hold.

With all the clear benefits that come from KPIs, one would assume that they would be widely used and adopted by business leaders.  However, paying attention to KPIs is sadly not the norm.  KPIs are easy to identify, and there are tons of numbers that could be developed for any business, but then the challenge is that business leaders become overwhelmed with so many numbers that they don’t know which ones to pay particular attention to.

What is often forgotten about KPIs is the word, "Key."  The numbers that can really help managers guide their businesses are the “key” numbers that depict things that truly make or break the operation. “Key” numbers are usually just a few important measures, but they are not always easy to determine without the critical thinking about what makes the business tick. Huberty’s advisors assist business owners in focusing on the KPIs that matter most to their success. Huberty also helps educate owners and managers in understanding KPIs and how they can utilize them to their benefit.

So now that we’ve explained what KPIs are and how they relate to your business, what are some KPIs to keep track of and analyze? Here is a short list of some typical KPIs Huberty recommends for small business clients:

  • Cash Flow Forecast – Cash flow forecasts are one of the most important KPIs for a business. They assess if there will be sufficient cash available by forecasting out profits, savings, costs, and expenses weeks ahead of time.
  • Gross Profit Margin – Gross profit margin as a percentage of sales is an expression of a business' profits on the sale of its products and services. Gross profit margins measure the adequacy of pricing and the relative efficiency of operations and purchasing.
  • Revenue Growth Rate – Revenue growth rate refers to the rate at which a business’ sales are increasing. Regular revenue growth rate calculations measure whether a business’ revenue is increasing, decreasing, or remaining stagnant.
  • Days Sales Outstanding – DSO, as it is referred to, measures how many days, on average it takes for a company to collect on its accounts receivable.  It is an important indicator of how long the business is waiting for its cash, and how effectively its collection policies are functioning.
  • Inventory Turnover – Inventory turnover keeps track of how much of a company's inventory is sold or used within a specific period. Keeping track of inventory turnover is crucial as it indicates a business' ability to move goods. While a high inventory turnover rate is generally good, it could be harmful if the profit margins on the inventory are too low.
  • Accounts Payable Turnover – Calculating accounts payable turnover provides the rate at which a business pays for its purchased goods and indicates how long the business typically hangs on to its cash before paying suppliers. Keeping track of accounts payable turnover is a key cash management strategy that helps a business determine when and how much to pay suppliers.

These are just a handful of KPIs that affect a business' daily operations and profits as well as their long-term goals and profitability. Regularly monitoring these or other relevant KPIs will help a business remain at the forefront of its industry.

If you could use some insight into how to create and track critical numbers in your business, please reach out to Huberty’s business advisors. Together we can help you analyze and develop the necessary KPIs to help guide your management decisions and keep your business on track.

To learn more about KPIs and how Huberty can put them to work to profit for your business, contact a Huberty advisor today!