Key Results Areas (Part III) and Key Performance Indicators

You know your goals, you measure sales, production efficiency, delivery accuracy, and overall customer satisfaction rates. You learn from the financial reports that the accounting department give you. You use all these to help you plan your future growth. As you grow, you continue to focus on broad-brush items, as well as the specific Key Results Areas and the Key Performance Indicators (KPIs) within them. The Key Performance Indicators give you the detailed information you use to keep your plans on track.

Many CEOs’ backgrounds are more practical than financial. They have a background in the products their company makes, the services it provides or industry in which it operates. Few small and medium-size businesses have a CEO who is, primarily, an accountant. The finance numbers are just as important as the others – especially when meeting with the bank. It is just as important to know the financials as it is the production, delivery and support parts of the overall picture. In this third article on business growth planning, we will look at six simple financial KPIs that will also support your growth.

Current Ratio: This KPI tells you how able the business is to pay off its debts within a given period of time. When you know your current state, you can use it to plan your future state. It is a simple ratio between your current assets (cash on hand, accounts receivable, and inventory, etc.) and current liabilities (payroll, rent, taxes due, accounts payable, etc.)  A ratio of less than 1:1 says “Too much debt”, while a ratio of 1.5:1 or 3:1 says “Healthy asset position.”  When you know this ratio, and if it tells you that the business is generating consistent income, you can focus on growth or, if it is too low you know to work on bringing in immediate new profitable sales, or cutting costs.

Quick Ratio: This is the quick-and-dirty version of the Current Ratio. It tells you how much liquidity the business has in its two most current assets (cash plus accounts receivable) to cover its current liabilities.  It is also known as the “acid test.”  A ratio of better than 1 :1 is good.

Working Capital: “Current Assets minus Current Liabilities.” This KPI calculates your company’s working capital position and gives you a summary of the business’s short-term financial health. If it is a negative number, you have a big problem and will know it before you make the calculation. You are looking for a calculation that is a high positive number.

Accounts Payable Turnover: This KPI tells you how quickly the business pays off its creditors.

Debt to Equity Ratio: This is a critically important KPI. It tells you how the business is, or will be, funding growth. A high ratio says growth is being funded by debt. If the ratio is too high, or if the forecast change is too far into the future, it says the business may run out of money needed to maintain its growth. Or, that future growth – new products, new market sectors, etc – may need to be postponed, unless the business begins to make changes now.

The Take-Away

Sound business growth planning demands knowing the numbers. Those numbers mean a lot when they are understood properly, and what they say are acted on. Growing a business takes clear goals, effective planning and proper monitoring.

Remember, running a business successfully does not need to be complicated.  Keep it simple!

For more valuable articles to help you successfully manage the challenges of growing your business profitably, please search our blog at our website www.portalcfo.com.

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