How can you track your company’s performance to make sure that it’s on track for success? This is a question that Marlin Steel President and Inc. columnist Drew Greenblatt recently tackled in an article for Inc.com.
According to Drew, one of the biggest problems we have in today’s business is not a lack of information, but an information overload. Business owners often spend so much time focusing on the wrong Key Performance Indicators (KPIs) that they may end up ignoring other, more important KPIs.
To combat this, it is necessary to know which KPIs are the most vital to improving your business’ success. So, what are these KPIs, and how do they indicate a successful company strategy?
To answer this question took a little research, and with a little help from articles written by financial luminaries such as Bottom Line Growth President Carol Coughlin, it was possible to narrow down the list of KPIs that businesses need to track to eight major things, including:
KPI #1: Sales
This KPI seems like a no-brainer, true. After all, if a business isn’t selling products or services successfully, then it cannot make money. However, tracking this KPI is about more than just month-by-month numbers, it’s about tracking patterns in sales over the course of the year.
In the example used in the Inc.com article, it’s mentioned that some of Marlin Steel’s automotive customers shut down their plants for months at a time, so Marlin cannot count on getting big material handling basket orders from those companies’ automotive manufacturing engineers during the months of July and August.
Because we know this, we can prepare for a dry period in sales to these customers and shift focus to other markets in advance to minimize lost productivity and sales. On the flip side, if you know business from a particular market picks up regularly during certain months, you can add new personnel and equipment as necessary to make the most out of the busy period and avoid losing orders.
KPI #2: Gross Profit Margins for Each Product Line
In any business, there are almost always product lines with a low profit margin, which barely bring in enough money to justify the expense of producing it. Identifying low-margin product lines and eliminating them (or at least finding ways to improve their profit margin, if such a line is a “loss leader” for your business) before they can drag your company down is a must.
KPI #3: Liquidity of Assets
Ask yourself “how long would it take to convert my assets into cash on short notice, with as little value lost as possible?” The answer to this question should give you an idea of how liquid the assets in your business are. This should include things such as how quickly your clients’ debts to you will be paid, how much money is owed to your vendors at any given time, and how much inventory you have that is piling up or being sold.
If you have too much excess inventory and other hard to convert, underperforming assets, that can be an early warning of potential risks to your company’s financial wellbeing.
KPI #4: Cash on Hand
This almost goes hand in hand with your examination of your liquid assets. As Carol stated in her article, “Managing cash is one of the most essential… financial function(s) of a company.” Drew takes this proclamation a step further, saying that “making sure you have cash to run the company is your most important KPI.” Without capital, a business cannot pay employees, vendors, or basic bills such as the lease or electric bill, so making sure that you have cash is very important, to say the least.
KPI #5: Debt Covenants
Business loans are often for very large sums of money, representing a sizeable risk for banks that make them. Because of this, banks may impose debt covenants on businesses which have taken out loans and need to be closely monitored. If the covenant is breached, the bank may impose severe penalties, even calling in the entire outstanding balance of any and all loans the business may have taken out.
Staying in communication with the bank and appraising them of potential problems ahead of time can go a long way towards smoothing out difficulties. Taking care of responsibilities as outlined in your debt covenant is very important for avoiding headaches down the road.
KPI #6: Intra-Industry Comparisons
Taking the time to research your closest competitors and seeing how they operate differently from your own company can give you valuable insight. Take a look both at what they better and what they do worse than you. Highlighting these differences can give you an idea of how you can improve your own company’s performance, and where you can be a little leaner.
KPI #7: Productivity per Employee
As was mentioned in KPI #1, the addition of labor to make sure that your business can handle upcoming surges is important. However, it is important to ensure that said labor is efficient. If the number of production units completed by each employee is too low, then your business’ profit margin suffers.
On the other hand, if your employees are completing an incredibly high number of production units, but customers are unsatisfied with the quality of the product, then it might be time to review the production process or add new personnel.
KPI #8: Operational Considerations Unique to Your Market
Last but not least, there are the KPIs that are specific to your industry that affect your company’s performance. Unfortunately, there are far too many different industries and business models out there to list a specific KPI for each in a single post. Whatever KPI is most important to your operations should fill this last spot on the list and be watched closely.
Read the article on Inc.com today!
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