Blair Morrison, CEO

Demystifying KPIs

The internet makes Key Performance Indicators (“KPIs”) seem like the gold pot at the end of the rainbow of business management. And thus these metrics are shrouded in so much mystery that the search for the perfect KPIs becomes an unachievable quest. Let me part the clouds of mystery for you.

Deciding on KPIs can be as simple as: Decide what is most important to your business goals and track that. So what is important? There really isn’t a “have to” when it comes to KPIs, but there are some “highly recommended” KPIs.

In the world of KPIs there are your “daily drivers” (KPIs you should take to and from work with you consistently) like revenue, cash balance (or change in cash balance) and profit margins.

At a minimum, I recommend reviewing at least these 3 on a very regular *at least monthly* basis. What is regular for your business depends on YOUR business. If revenue, cash and profit margins are all pretty consistent from month to month and have been for the last 5 years, you probably don’t need to take a detailed look at your financials super often. A quick glance every month will help you identify whether anything major has changed.

If your business is constantly changing with tight cash reserves, you may be checking your revenue and cash balances on a weekly or even daily basis, and your profit margins on a monthly basis.

CFO tip: Certain financial metrics are hard to review on a weekly or daily basis. Profit margins are one of those! While revenue may come in on a daily or weekly basis for your business, expenses are often more lumpy. Payroll is usually every two weeks and your rent may occur once at the end of the month. In order to get an accurate profit margin, a business manager needs to have a complete picture of all expenses for a given month. Thus, you can only really view this metric monthly.

Once you or your bookkeeper has completed your month end close, then it is time to review your profit and loss. Basically, a “close” implies that a vast majority of expenses have been accounted for in the correct time period (usually a month).

Now that we’ve determined the usual suspects of key performance indicators, let’s talk about key performance indicators that can be unique to your business!

The first stop in the journey toward discovering your KPIs is to decide how much time you have to review your financials on a monthly basis. If you plan to spend hours sitting down with your board or financial advisor every month, then you can have a more significant number of very detailed key performance indicators. But if the second Friday of the month has approximately an hour and a half allocated to “financial review,“ then 20 to 30 financial indicators is way too many. In order to realistically allocate some time to adequately review metrics, I recommend somewhere between 5 and 10 metrics max.

At their core KPIs are simply a list of things that you want to keep an eye on. It’s okay if you track different metrics than other businesses, they may have different goals. KPIs differ from company to company and can change over time!

So what KPIs should you use for your business right now? Go back to your goals. What were your core business goals? Increased revenue versus last year? Increased profit?

Was the increased revenue in a particular product line? If so, perhaps one of your KPIs, in addition to revenue, cash balance and profit margin, should be that particular product line’s revenue. A subcategory of a larger KPI like revenue can be essential in accurately tracking your progress toward this type of goal.

CFO tip: If your accounting system currently lumps all revenue into one category called “revenue,” this may be a good time to let your accounting team know that you need a new category so you can track a particular product revenue separately. Your accounting team will let you know whether this is possible and easy, possible but extremely costly or essentially impossible given your current systems and processes.

What other metrics could you track? Maybe the key to the growth of your business and the profit of your business is headcount and the size of your payroll. This is a metric that I track very closely for high growth startups. Knowing what your monthly payroll is and how much it’s growing as your business grows in relation to (think percentage of revenue) revenue can be really helpful in understanding how your headcount affects your other business goals.

There could also be some expenses that you want to track like marketing spend (more Google Ads = more revenue) or travel and entertainment (the food and travel spending was way too high last year and needs to be monitored to keep costs down this year).

Another metric is Gross Profit over time. If revenue is going up, but Gross Profit (Revenue minus Cost of Goods) is going up, that can help explain why there is less cash in the bank for the same amount of revenue. Maybe you have shifted toward products that cost more to produce or the inputs for your products have become more expensive over time.

In essence, key performance indicator tracking is all about deciding what the you need to keep an eye on to meet your business goals and then watching those items at least monthly!

Once you’ve selected your KPIs, it’s time to get started with AutoCFO!