Taking The Extra Step — How To Use
Key Performance Indicators
The basic techniques of financial analysis can be useful for anyone. Investors need to know if they’re acquiring a good asset. Lenders need to know what risks they’re taking. And entrepreneurs need to make better decisions about their business.
That’s why — by itself — a good set of financials is an asset. And also, the knowledge of how to read financials is one of the most important skill-sets a business owner can have.
However, while the basic statements are the most common way to represent financial data, they’re not in the best form for decision making without a good way to compare and interpret them.
What Are Key Performance Indicators?
Most CPA’s and accountants keep track of standard numbers such as sales, gross margins, and net profits. And while these are useful measures, there are others that are equally important — though most accountants are unaware of them. These measures are called Key Performance Indicators (KPI).
Some KPI’s are common to every business. They are often in the form of ratios, including information about a company’s liquidity, debt-to-equity structure, etc.
Also, there are other KPI’s more specific to particular industries. For example, in the restaurant business, an owner may want to know their sales per seat or seat turnover numbers, and so on…
However, while KPI’s are useful, their meaning is limited without a standard to compare them to.
That’s why you’ll need:
(1) Previous KPI’s from your company
(2) A predetermined standard, or
(3) KPI’s of other companies in your industry
This process is called benchmarking. And not only does it gives you a good idea of where you stand relative to your competition, but it also gives you a meaningful way to track your results as you improve your business.