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The 7 KPIs that Drive Profit and Cash Flow – Business

7 KPIS

How many business people do you think readily understand the financial reports they receive from their accountant once a year? An educated guess? Ten percent, fifteen?

Probably no more. Most business owners in my experience manage by “gut-feel“. A typical set of business financial statements provided by your accountant is prepared for tax purposes, rather than to really help you “manage the business”. What’s worse, the financials may only get to you 3 to 6 months, AFTER the end of your fiscal year. What good is that to you then?

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The issue is, the world is moving very quickly, we’re accustomed to information that is available immediately. You want to know what your business situation is today and what you can do about it now, not sort through an assortment of numbers from last year! Typically, your outside accountant deals with history. What has happened, not what is likely to happen. And because they’re so busy complying with all the requirements of the tax authority, most just don’t have time, many don’t have hands-on’ business training to do more than the regulatory body requires. 

So, where do you find the info that will help you increase your cashflow, and profits?

 

Is the answer to get more or better reports from your accounting system? Well, that may help you see what’s happened recently, but it may not help you change or adjust what will happen in future months!

What is most important is to understand what numbers really ‘drive’ profit. If you can fully appreciate what numbers ‘drive’ the results, you can adjust the ‘numbers’ to achieve a desired, much better outcome, before, not after you’ve had a less than satisfactory result.

7 KPIS

What are Key Performance Indicators (KPIs) ?

 

A Key Performance Indicator (KPI) is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs to evaluate their success at reaching targets. The secret to good financial control is knowing what to control and by how much. KPIs are not a new concept. They apply to all businesses and work to a greater or lesser extent, depending on the business type. What are KPI and why do they matter? Let’s bring a little more clarity to the subject.

In a typical set of financial reports

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In a typical set of financial reports i.e. Profit and Loss Statement and Balance Sheet, there are a lot of numbers. It can be a daunting task for business owners to make sense of it all. Then to know which numbers are the important ones. Of course some

would argue they are all important, but that’s only true if you understand what you’re looking at and can control them.

Of the seven KPIs, four are calculated from the Profit and Loss Statement and three from the Balance Sheet. How many business owners look closely at the Balance Sheet? It might be time, if the balance sheet doesn’t always make sense to you, to seek advice from a good Controller. Someone who looks at business issues from a management perspective. KPI in business are what will help you monitor the numbers that drive the Profits. 

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7 KPIs

Revenue Growth Percentage

 Most business owners focus their attention on revenue and this is of course critical. Equally critical is what it’s costing your business to increase your sales. If the other numbers below revenue aren’t being managed right, revenue growth will exacerbate cash flow issues.

Price Change Percentage

 

In a highly competitive market it’s tempting to sell for the cheapest price possible. However, many businesses fail to make regular small increases e.g. (CPI). This can cause margin squeeze and gross profit suffers, due to the increased costs of delivering the goods or services compared to the revenue. 

COGS Percentage

Cost of Goods Sold means the costs incurred to get the product ready for sale. A small reduction in COGS Percentage can have as much impact on profit as a large increase in revenue and may be much easier to achieve.

Overheads Percentage

 

Many business owners focus attention on overheads in the profit & loss statement without comparing them, (by percentage) to revenue. 

If you just look at the overhead dollar figure, you could make more revenue without increasing your net profit.

Days Receivable

This is the number of days, on average, customers are taking to pay. Managing this number can have a huge impact on cash flow. Reduction in accounts receivable days could put thousands back into your bank account. To improve this number, focus attention on speeding up customer payments.

Days Payable

This is the number of days, on average, you take to pay suppliers. Some changes to accounts payables management can pay big dividends in your bank account.

Days inventory

This is the number of days, on average, that goods for sale, or raw materials are sitting in your storeroom, from when they are delivered by suppliers, to when they are shipped to customers.  If you can reduce the number of inventory days, this can have a big impact on your bank account and working capital situation.

The KPIs mentioned above can have a huge impact on profit and cash flow. A small change in any one, or a combination, of these can have surprising results.

 

 Most are not contained in a typical set of financials, which is a frightening thought, considering how important they are and how they literally control your profit and cash flow!  

 

These are numbers you can do something about. They are within your power to control and manage. 

"You don't have to wait for your accountant to prepare your end-of-year financials, if you have a part-time Controller. Let me help you understand the basics of financial management in away that is relevant to your business" .
Agnes Nkundabagenzi
CMA, CPA

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