KPI’s, key performance indicators are critical for managing your business. You can’t manage what you don’t measure, right? Goals allow us to stay focused and manage our businesses effectively. Here are 4 KPI’s for you consider:
Liquidity– You may be profitable, but how much cash do you have in your bank account? Measure your cash by the number of days of sales you have in the bank. If you sell $3 million annually, that’s about $8,200/day. If you have $40,000 in the bank, you have 5 days sales in cash. Somewhere between 5 and 30 days sales is a good goal.
Leverage– Who has more at stake in your business, you or your creditors? Leverage is the amount of debt/the amount of equity. Most banks are willing to loan you money if you have up to $3 of debt to every $1 of equity or a 3-1 leverage ratio. Above that, you may be looking at asset based lending which will be at a much higher interest rate.
Asset Quality– How are your clients paying you? The number of days sales you have in accounts receivable will tell the story. Annualize your sales/360 and you come up with your daily sales. Taking the same $8,200 in the prior example, if you have $320,000 in accounts receivable, then you’re collecting your receivables on average every 40 days. Most businesses have net 30 days terms and average days sales of 30-45 days.
Profitability– How profitable are you, gross and net? Dividing gross and net profit into sales will tell the story. You might want to check yourself against historical performance or industry peer information if available.
KPI’s are critical to your business and can give you valuable insight. We hope it’s something you’ll consider implementing in your business. You can’t manage what you don’t measure.