Every accounting system measures cash, deferrals and accruals according to Generally Accepted Accounting Standards. Every accounting system outputs various statements and reports that show the financial health of the company at a point in time. Law, investors and common sense usually require this. But does your accounting system give you the kind of Key Performance Indicators (KPIs) that you need to insure your business is one to take pride in?

KPIs – A BEGINNER’S LIST

Do you have a KPI list? Every business is different and therefore, different KPIs are important to each. In choosing the KPIs you want to monitor, cast a wide net. Choose all that you think may be appropriate. Eventually, as you gain experience monitoring them and seeing how each relates to your overall business picture, you may weed some out as not relevant.

Here are some monthly KPIs every small business should consider monitoring:

• Count and approximate amount of leads • Count and amount of sales • Profitability per product • Number of telephone sales made • Marketing expenses • Count and amount of outstanding opportunities • Referrals gained • Testimonials received • Number of sales calls per sales rep • Customer complaints • Standard cash flow report • Debtors’ report • Creditors’ report

These items are then distributed to key personnel for evaluation. Management gets together monthly to discuss them and brainstorm on ways to improve their numbers. They note any standard symptoms that lead to lack of business success and take measures to correct them and avoid them in the future. The following are some common symptoms ones to watch out for through the use of your KPIs.

PROBLEMS TO BE AVOIDED WITH GOOD KPIs

Less than 10% of opportunities are converted to sales. Do you have leads that are not followed up on, or worse yet, not followed up on adequately? Depending on the source, a lead can be one of your best opportunities for a sale. Study your leads before they are contacted. What are they looking for? Let that guide your initial discussions with them.

You have a product that has been loosing money consistently. Surprisingly, this is a common problem. When companies don’t look at products individually in terms of their costs vs. their revenues, they are doing themselves a big disservice. In fact, you can have a product that makes you more revenue than any other product, but if you’re spending more to make and market it than your receive in sales, it’s still best to ditch it, or at least find a way to reduce costs. You can’t make these determinations without good product profitability reports.

The sale team is not following your defined sales processes. This could have a number of consequences, not the least of which is that you can’t count on your accounting and management reports to accurately reflect what is actually happening in the company. You must always know what your sales team is doing and how they are doing it. Remember that they represent you. For legal and financial purposes, they ARE you!

Communications failures between individuals and departments are frequent. This can result in lost income and/or increased costs; neither of which should be tolerated. Don’t let your business fail because one hand doesn’t know what the other is doing.

There is no consistent pricing being used. This must be standardized, usually as a legal requirement. It is illegal to discriminate by giving one customer a better price than another for substantially the same product or service.

Customer complaints are on the rise, always a significant indicator that something in your organization has gone awry. Do the complaints indicate a problem in a pinpointed area of the sales or receivables cycle? Pin it down, analyze it and correct the process to prevent future recurrences.

There is no process to evaluate customer satisfaction. If you don’t know what your customers think of you, find out! There are many ways to do this. You should have some type of regular communication with them. Try a newsletter which encourages customer comments. Or perhaps you could send out a survey periodically to gauge their satisfaction.

There is no process to gather customer referrals. If your customers are very happy, encourage them to spread the word. Your best customers’ recommendations are another excellent source for new leads. Ask them to recommend you. It couldn’t hurt!

SUMMARY

It is the responsibility of every business owner to ensure the business is performing efficiently and especially, profitably! Key Performance Indicators can be a big help in this duty and can usually be integrated into a good accounting system to produce necessary management reports on a monthly or faster basis.

Michael Russell
Your Independent guide to Accounting