I love competing in marathons, but let’s face it, 42kms is a long way. If I want to succeed – performing at my optimal ability – I need to focus on a number of metrics in training. A lot of people just focus on one – distance – which may not lead to a successful race. You see, it’s not just about measuring the distance I run, but also measuring my heart rate so I know it can go the distance; improving muscle strength so I know they can carry me the distance; measuring water consumption so I don’t dehydrate, and measuring my speed so I know I’m getting faster. It’s not just one performance measure, but a bunch of metrics I need to track, to get me running towards marathon success.
And it’s just like that with a business. I often find business owners focus on only one measure of performance – the balance sheet. Yes, it’s crucial to monitor this, as it helps explain the “what” of business performance, but if you want optimal performance, you need to focus on other metrics – the Key Performance Indicators (KPI’s) – to understand the “why” – what’s driving the balance sheet figures. Then you can really start to make key decisions to drive your business to success.
The nature of your business will depend on what KPI’s you measure, but here are some of the important ones:
Customer Acquisition Costs (CAC)
This is vital for anyone starting a business. You need customers to make money, but you’ll most likely need to spend money first, to get them. The CAC is the amount of money you spend on marketing, on average, to gain a new customer.
Calculated as: Marketing & sales expenses / no. customers gained
If the number’s too high, you’ll need to examine your marketing approach, cut back on poor performing areas and consider alternatives.
Average Revenue per User (ARPU)
Used mainly for analysis in companies offering subscriptions (think internet services and telecoms), ARPU is used to figure out the average amount of revenue generated by a single customer (or user).
Calculated as: Revenue over a defined period / no. customers in defined period.
This is a great metric to use when trying to figure out how well you’re selling products and services to current clients. If the ARPU calculated is too low, you may not be selling your products effectively and will need to consider strategies (eg offering add-ons etc) to boost revenue from existing customers.
Stock Turnover Ratio (STR)
Are you selling physical goods? Keeping on top of your stock levels is crucial. You generally want a high ratio for this metric, as it indicates the company can sell the inventory it buys.
Calculated as: Cost of goods sold / average inventory
Wages to Sales Ratio (WSR)
If you own a retail business, you want to know your floor staff is proving their worth.
Calculated as: Wages in a week / weekly sales figures X 100
Example: $3,000 weekly payroll / $10,000 weekly sales = 0.30 X 100
= 30% ($30 in wages for every $100 earned)
If your calculations don’t look good, you may need to address some uncomfortable aspects of the business. You could start with some extra sales training for your staff, but you may even need to make some staff changes.
Average Collection Period (ACP)
This metric involves calculating how long it takes for a business to collect money owed by customers.
Calculated as: Accounts Receivable / (Credit Sales / 365)
Generally speaking, you want to keep this number as low as possible, as you need to be able to pay your expenses, and the only way to do that is to collect money owed to you, in a timely manner.
Average Payment Period (APP)
This is basically the opposite of the ACP, as it looks at how long it takes a business to pay money owed to creditors:
Calculated as: Accounts Payable / (Credit purchases / 365)
A short payment period means you’re paying creditors in a timely manner, but it could also mean you’re not making the most of the supplier’s credit terms. If you look into these terms, you should be able to find a payment period that delivers the greatest benefits to you.
Keeping Track of KPI’s
It’s important you and your staff are up to date with how your business KPI’s are tracking. That way, everyone is on the same page and can work toward the same goals.
Here are a couple of ways to keep track:
- Keep a scoreboard/dashboard in the office to display weekly KPI’s; ensuring KPI’s are updated regularly, so the necessary business decisions can be made, or
- Use accounting systems with KPI dashboards. There are some excellent cloud accounting systems that help not only with KPI tracking, but with overall business efficiency.