Measure for measure – what are the best KPIs for analysing business?

Many AAT members have asked, what are the best KPIs? We put the question to a panel of accountants.

The successful use of KPIs involves selecting the right measure and measuring the right things. This makes it both art and science – which makes accountants curious it.

A crude KPI can be as damning and destructive as an executioner’s axe wielded over the heads of those whose performance it measures.

But a well-chosen set of KPIs, on the other hand, can throw light in dark recesses of the organisation or the outer reaches of the marketplace, exposing hidden dangers or untold opportunities.

Here are some of the KPIs that have been identified by accountants as being some of the most valuable:

• Profit-per-customer/customer group
• Client lifespan
• Gross and net profit margin
• Maximum production capacity
• Revenue per employee

Below, accountants share some of their most useful KPIs:

Profit per customer group/client behaviour

Mahmood Reza, director, Proactive Resolutions, founder, Love My Accountant Day

I think people get drowned in KPIs but don’t necessarily understand what they’re supposed to do. For me, it always starts with: what’s important to you in your business? That’s basically what you want to measure.

In terms of favourite KPIs, you’ve got to make money –  otherwise, you’ve got an expensive hobby on your hands. So things like Profit Per Customer Group, Profit Per Individual Client would feature.

If you’re putting time into social media, look into the leads and enquiries that you’re getting and how many become a genuine lead, such as Conversions From Enquiries. And clients that leave you – you could go with Client Retention, but I would look at how long you tend to work with clients and how much money you make from them during that time.

People talk about keeping clients happy, so what are you doing about that? How often do you communicate with them? Do they feedback to you? They’re all extremely valuable things to measure.

Gross profit margin

Neil Stern, partner, MHA MacIntyre Hudson

It does depend on the business and what I am looking for but gross profit percentage is always key.

Apart from reviewing year on year trading performance, it gives a feel for the market conditions businesses are trading in and leads to strategic conversations on the best way to move the business forwards. It is a key metric when reviewing sale price and whether it is appropriate as well as the overview of the production costs and techniques.

Dan Heelan, business services director, Heelan Associates

It has to be gross profit margin, right? Clear winner.

Net profit margin

Sherad Dewedi, managing partner, Shenward Chartered Accountants and Business Advisors

Net profit margin as it gives a quick indication of profitability after all expenses. It.can be benchmarked and analysed for further improvements.

Productivity/revenue

Claire Hubbert, managing director, Clarity Financial Services

The thing with KPIs is that one business won’t necessarily find another business’s KPIs useful. I work heavily within manufacturing. People will always check the obvious ones – Debtor Days and Creditor Days – which is useful from a cashflow point of view.

But for me, it’s the work that you do to understand the business and the real drivers that determines [the best ] KPIs.

In manufacturing, I always look at how many Available Production Hours the firm has. That is the maximum capacity that you’ve got to work with to make sure you get the margins you need to continue to invest and grow your business.

Once I’ve determined what their maximum capacity is, I then look at identifying the KPIs based on the required billable hours. You also will have downtime in manufacturing, and you should be monitoring that. These things need to be monitored in real-time, or there could be a huge impact.

I’d also have Production and Maintenance Time as a KPI, where I’d expect to get a report every week against what I’d forecast and what was actually happening.

Manufacturing doesn’t always have the greatest of margins, so if you don’t keep a close eye on your inefficiencies, then you do lose track of your total available production hours and you lose money from your margin.

It’s why KPIs should be about more than the financials. It has to be about maximising your efficiencies.

Samantha Perkin FMAAT, director, Zamu

Revenue earned per employee!

Ian Rodd, managing director, Ward Goodman

Anything around pricing and its impact on the turnover equation. For example, the Average Spend Per Head/Visit etcetera, as it can be related to so many business inputs.

Most important KPIs for businesses right now

Mahmood Reza

I would say how much your bank balance is growing by – the money in your bank once you take away salaries, expenses and bills. Things like  percetnage client increase could also be useful.

Claire Hubbert

From a manufacturing point of view, they should all be looking at their productivity KPIs. And it goes without saying that you should be monitoring your cash – you should try to project cashflow over a 13 week period, and that should be updated at least once a week.

Summary

As Einstein is reputed to have said, “Not everything that can be counted counts, and not everything that counts can be counted.”

Choose your KPIs wisely and they will serve you well.

Mark Rowland is a journalist and former editor of Accounting Technician and 20 magazine.