Home – New Forums Money matters Key Performance Indicators – or how to track how well your business is doing

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  • #966014
    Accounts Studio
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    I was having a discussion with someone recently about KPIs (key performance indicators) and how useful they are to keep track of where your business is at – for example a client recently had a decent increase in turnover but when we looked at his ratio of wages to turnover, it had also jumped from 25% to 42% which meant that overall his costs were increasing at a much higher rate than his turnover.

    I was interested to know whether other members keep track of their KPIs and if so whether there is a standard for your industry. E.g. I have a client in the retail takeaway food industry who always trys to work to 30% cost of goods and 30% wages, another in the arts industry who tries to keep to 25% wages/turnover ratio.

    Just wondering what others do. Thought it might be useful for new businesses to have an idea of what percentage of their turnover they should be spending on things like marketing, wages, etc.

    #1015464
    Warren Cottis
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    Hi Ideas Book

    May I respectfully say that you are talking about financial ratios and not key performance indicators.

    Financial ratios are “after the event” indicators whereas key performance indicators are day to day or week to week indicators that indicate where your business is heading.

    For example, if you know your sales people need to make 10 sales calls a day and they are only making 5 a day for the last two weeks then you know the money flowing in 30, 45 or 60 days later is not going to be that good.

    #1015465
    Accounts Studio
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    Hi Warren
    Thanks for your response. Actually KPIs are one of those terms that has different definitions in different organisations. It is a measure that gives you clues about how another measure might be affected in the future. In recent times the term has become commonly used with team performance measure and whilst there are many who use the term ‘KPI’ to mean the qualitative performance standards in employee job descriptions, there are many others that use the term to measure performance of the company in other ways. Yes I am talking in this instance about financial ratios but these are in fact also used as key indicators of the performance of the company by many organisations.

    #1015466
    Accounts Studio
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    Small world – I just read that the ATO has released 50 new KPI benchmarks for various industries showing expense to turnover ratios. http://www.ato.gov.au/businesses/content.asp?doc=/content/00214689.htm

    Another interesting read on this subject is http://www.kpilibrary.com which contains recently benchmarked KPIs – including financial ratios as well as staff performance measures.

    #1015467
    BruceR
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    Hi Sophie,

    I agree with you that financial ratios can be, and usually are, KPI’s for a business. I think by definition any KPI is an ‘after the event’ measurement – the aim is for the data to be timely enough to allow change to be made before the next measure is done.

    Also thanks for the benchmark links!

    Bruce

    #1015468
    Accounts Studio
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    Thanks Bruce. They make interesting reading.

    #1015469
    Warren Cottis
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    Ideas Book, post: 17297 wrote:
    Yes I am talking in this instance about financial ratios but these are in fact also used as key indicators of the performance of the company by many organisations.

    Sorry Sophie, I just cannot agree

    Financial ratios have always been historical measures of what has happened.

    The word “indicate” means to show the way to or the direction of something.

    If people trust that financial ratios are key performance indicators then most people will have gone broke by the time their accountant has told them so

    KPIs are the day to day, week to week measures of whether your business is going off the rails.

    The essence is “timeliness”… sure you can say that “there are many who use the term ‘KPI’ to mean the qualitative performance standards in employee job descriptions” but if you do annual reviews and that person is off the rails for 12 months you could have lost a pile of business.

    Since you have recommended some reading I would like to recommend “The Balanced Scorecard”

    #1015470
    Accounts Studio
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    Hi Warren

    Well I certainly would not be advising any business to do performance reviews of any kind only once a year. Even if an official staff review was only done annually I would hope that there was some kind of notice and measuring being done during the course of the year and employees were not just being left with no guidance or tracking in place.

    My argument was that there are many different types of KPIs, including ones I was referring to, and ones you were referring to. My advice to any business would certainly be to have a number of different measures and benchmarks that are reviewed weekly, monthly and annually. I don’t know many businesses that only look at their p&l and financial ratios once a year either, but I guess some do and I guess they also learn pretty quickly that they should be looking at them a lot more often.

    Financial ratios can “indicate” a problem that might be cropping up and enable the company to put in place measures to counteract. Sure if you are only looking at your p&l in hindsight once a year then it is not going to be very helpful, but as I mentioned above, I, and my clients, look at ours monthly and as such it can be useful especially when comparing to industry standards and when being used as part of an overall KPI plan.

    Thanks for the suggestion – I will check it out.

    #1015471
    Warren Cottis
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    I will rest my case with “timeliness”… it will save a leaking yacht or let you steer it more effectively… people in this Forum should not wait for historical ratios or your accountant to confirm what you fear when simple day by day or week by week indicators can let you change, adapt and innovate

    #1015472
    Accounts Studio
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    Totally agree and never implied otherwise.

    #1015473
    Karen Wardle
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    Thanks for the links Sophie.

    Karen
    http://www.you-can-start-business.com

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