Are You Tracking the Right KPIs?

An accountant on a laptop with “KPI – Key Performance Indicator” written nearby surrounded by business icons and financial charts.

Every day we talk to business owners and CEOs that are worried about how their company is doing financially, but recently there has been an uptick in uncertainty around the metrics they use to evaluate their performance as well. The trend towards questioning whether the business is measuring the right things or enough things is growing. More and more business leaders are asking things like:
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• “Do I have enough information to understand how well we’re really doing?”
• “If there was a problem, would we know early on so we could take the right steps before the problem got too bad?”
• “Are the metrics we are reporting on truly meaningful to the success of the business?”
• “Are we using the right benchmarks to evaluate our performance relative to industry averages and key competitors?”
• “Do we really know where the money is going?”

​While every company will have their own mix of KPIs (Key Performance Indicators) to reflect their unique needs, there are 10 overarching metrics that are essential to track and analyze:

Customer Lifetime Value (CLV)
What is it?
Short-term metrics like average order value (AOV) measure how much revenue a customer generates in each transaction, while CLV aggregates all of the sales that an individual customer is responsible for to determine what their long-term value is to the company.
Why is it important?
CLV takes customer retention into account because the longer someone remains a customer of the business, the more revenue they will be responsible for generating. Therefore, companies that have brand loyal customers will have higher CLV figures. Where CLV is low, businesses should look for ways to steer customers toward higher margin products/services, upsell additional offerings, and encourage repeat purchases.

Web Conversion Rate
What is it?
For companies with an online presence, conversion rate represents the number of web visitors that took a desired action. Typically, this action is completing a sale, but for service providers a conversion can also mean requesting a consultation, downloading a whitepaper, signing up for a seminar, etc.
Why is it important?
Conversion rate is an indication of how well your sales strategies are working. A high conversion rate signals that sales and marketing are well aligned, while a low conversion rate is indicative that there is an issue with your marketing strategy, sales approach, pricing, features/design, or some other business component.

Customer Acquisition Cost (CAC)
What is it?
As the name would imply, CAC measures how much it costs to acquire a new customer through whichever channels the company utilizes for sales. All of the costs incurred in acquiring a customer should be included in this calculation, including online and offline advertising expenses, marketing team salaries, and sales staff bonuses.
Why is it important?
On its own customer acquisition cost is not a determiner of success. However, when compared against metrics like average order value and customer lifetime value, it can be used to assess whether marketing and sales efforts are successful. It can also provide a target for cost improvement because where CAC can be reduced margins will increase.

Net Profit Margin
What is it?
When it comes to profit margin, there is net profit margin, gross profit margin, and operating profit margin to consider. But of these, net margin is by far the most important to measure.
Net profit margin measures how much of a company’s revenue is profit. It is calculated by subtracting COGS, operating expenses, and other non-operating expenses from income to get net income and dividing that figure by revenue and then converting it into a percentage. Operating expenses include things like rent and utilities while non-operating expenses include things like taxes and debt payments.
Why is it important?
Net profit margin (also known as “net margin”) is one of the most important metrics used to analyze a company’s financial position and stability. It is a good determiner of bottom-line financial health because it indicates whether a company’s costs are being well-managed and how profitable the business is as a result.

Revenue Growth
What is it?
Revenue growth indicates how much revenue from all sources (sales, investments, real estate, fees, royalties, etc.) is growing year over year.
Why is it important?
While net margin takes money going out of the business (costs) into account, revenue growth only looks at the money coming in. By comparing it to the year prior a company can get a true sense of how the business is growing independent of how costs are trending. All financial software tracks this metric because it is crucial in understanding what is happening with sales and other significant revenue sources.
  
Quick Ratio
What is it?
Quick ratio is calculated by dividing cash and cash equivalents by current liabilities. Expressed another way, it is current assets minus inventory divided by current liabilities.
Why is it important?
Also known as the “acid test ratio,” a company’s quick ratio measures a company’s ability to meet its short-term obligations. It also indicates how well a company is positioned to respond to a liquidity crisis, making it a measure of business agility.

AR (Accounts Receivable) Turnover
What is it?
Accounts receivable turnover is calculated by dividing net annual credit sales (i.e. any sales that are not paid for in cash) by average accounts receivable.
Why is it important?
Also known as “debtor’s ratio,” AR turnover measures how well a business’s customers are paying their invoices within a designated timeframe. Typically, this will be either NET-30, NET-60, or NET-90 payment terms. The resulting number indicates how many times AR is turned over in the time period being measured; and therefore, how many days it takes to receive payments on average. Most invoicing software does this calculation automatically, making it easy to keep track of and spot trends as they begin to emerge. When AR turnover starts to grow, a business will want to incentivize faster payment and go after outstanding invoices to improve cash flow.

Employee Retention
What is it?
Employee retention measures how many employees remain with the company over a set timeframe (usually year over year). While it simply measures the number of employees that have stayed, it also speaks to employee satisfaction and engagement.
Why is it important?
Without employees a business cannot survive. For this reason, keeping employees happy in their roles is critical to equipping them to do their best work. When employee turnover is high growth will be stalled as resources are devoted to recruiting, onboarding, and training new employees. Track employee retention to identify business culture or professional development issues as soon as they arise and keep business growth on track to achieve organizational goals.

Customer Satisfaction (CSAT)
What is it?
CSAT metrics like net promoter score and others measure customer satisfaction reflected through brand loyalty and engagement in an attempt to gauge brand sentiment and predict future business growth. 
Why is it important?
Low customer satisfaction is the smoke that indicates there is a proverbial fire somewhere. When customer satisfaction is in decline or steadily low, customer service, product development, or web UX (user experience) should aim to address the root cause. Lifting customer satisfaction will have a ripple effect, driving positive change across other important metrics like revenue growth and customer lifetime value.

Customer Churn Rate
What is it?
A measure of how many customers do not return after making an initial purchase or cancel once their subscription/service period ends.
Why is it important?
Acquiring customers is expensive. It is more cost-effective to retain existing customers than to go after new customers. Tracking customer churn offers insight into how many customers are being retained and how many are leaving. For companies that do not track customer satisfaction-related metrics, churn puts hard numbers to whether customers are satisfied enough to stick around. While this metric will not tell a company why their customers are leaving, it can serve as a wakeup call when product or customer service-related issues are hampering customer retention and sustainable revenue growth.

For a deeper dive into KPIs, download A Comprehensive Guide to KPIs from our partners at CFO Selections! 

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When you need help with KPIs and reporting, reach out to us! We have a team of highly experienced consulting accountants that can help your business figure out what to track and get the processes in place to do just that! Whether you need to do more regular reporting, upgrade your accounting system, or find additional support for daily accounting activities, we have the right team in place to meet your needs. Find out more today!