What is a KPI? How do you use KPI for every facet of your business?
KPI is an acronym for Key performance indicators. KPI is a metric or set of metrics companies use to measure performance. The use of KPI for every facet of your business is significant to upper level management decision making purposes.
Accounting experts can help your business identify the most important KPIs.
Businesses survive by metrics and statistics. Everything is measurable in the business world. So when we talk about KPIs for your business, we are really talking about your organizations life blood.
Critical KPIs for Your Corporation or Limited Partnership
A few critical indicators, depending on your industry are:
Gross Profit Margin:
When assessing your company’s financial health the first thing to look at is Gross Profit Margin or gross margin. Gross profit margin helps financial managers to tweak the corporation’s or partnership’s business model for greater success. It show the snapshot of the business revenues after accounting for cost of goods sold (COGS). To arrive at gross profit margin the accountant divides gross profit by revenues.
Churn down rate is the yearly percentage rate that measures the number of customers who discontinue their subscription to a service. This is especially popular in online marketing businesses. A good example is an online business, such as software applications. With a software applications, the churn rate may tell them that a certain update or feature was very successful or not so successful based on year over year comparisons.
Another example is a shopping club’s product change, such as going from non-organic product stock to organic may make the club more appealing to a new demographic while not affecting the previous membership. Or, another example is discontinuing a store department, such as a pharmacy or eye glass service, and comparing that to before the change took place as to a decrease in the store’s foot traffic.
Much like other trends, churn rate is also helpful to help a corporation determine the number of employees who leave a job year-of-year. The Human Resources manager will take this number and compare it against company changes that have taken place. This is then analyzed against other metrics to determine how the business can be more attractive to new talent out in the market.
Lifetime Value of a Customer
Another significant metric that contributes to KPI for every facet of your business includes the lifetime value of a customer. Customer lifetime value (CLV or CLTV) is also known as lifetime customer value (LCV), or life-time value (LTV). Lifetime Value forcasts the net profit taking into account the entire future relationship with your customer base. This calculation is useful when preparing to invest in marketing or if you plan to make an acquisition. Calculating lifetime value takes several steps.
Burn rate is the rate at which an business spends money, or burns through capital, over and above income. Again, this rate is useful when preparing to make a large investment. Do you see the trends here of KPI for many facets of your business?
When you want to measure the success of a venture, such as a campaign of some sort, you would run an Activation Rate or ratio report. An example is an online advertising campaign. Here you will take the number of users clicks on a certain ad or URL; divide that number by the number of people that made an actual purchase. This can be an item number, QR code or UPC that sold through the retailer’s point of sales system. Client conversions indicate these rates. This is a great metric when is comes to KPI for every facet of your business.
Daily Active Users Versus Monthly Active Users Ration
Monthly active users (MAU) is the grand total of daily active users over a period of one month. For a software start up company, a monthly active user is contingent upon the event went the customer actually opens or views the app at least one time during month. The ratio of DAU/MAU is a measure of repetive visits to the internet product’s application.
Revenue Growth Rate
These numbers can above the line of your small business’ income statement and is usually part of the quarterly and annually reports. Your accounting professional will know to divide that difference by the revenue number from the prevous period. Then multiply that number by 100. You should arrive at the percentage growth rate of total revenue between the two periods. Again, those periods can be annually, quarterly, monthly, weekly or daily. However, remember to keep it consistent.
How do KPIs improve your company’s performance?
So what do you think of KPI for every facet of your business? Regardless if you are a large corporation, a limited partnership or a small business, key performance indicators are excellent tools to measure your business’ future. Watch this video below:
If you want to learn how to use KPIs to improve your company’s performance or you need an accounting professional to assist your with any of the calculations mentioned above. By all means, call Alex Franch, BS EA a call at 781-849-7200. To read more from the IRS on this subject matter, click here.
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Alex Franch, BS EA
Mr. Franch is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Mr. Franch is an Enrolled Agent and has eight years of tax preparation experience. He has been serving individuals, families, and businesses for several years with tax and financial planning strategies and is a junior partner with the firm.
Mr. Franch is licensed by the Financial Industry Regulatory Authority (FINRA) with a Series 6, 63, 65, and 7, and by the Commonwealth of Massachusetts Division of Insurance.
Alex Franch is a registered representative of and offers securities and investment advisory services through Commonwealth Financial Network, A registered broker-dealer, Member FINRA/SIPC.