Sure I’m an accountant. But let’s face it, numbers can be really boring! You can measure just about anything in a business and the data overload can quickly become overwhelming. There are many operational factors that are essential to the determination of appropriate metrics. When should we start? What do we start with?
If you can start from the beginning, that’s great but sometimes that doesn’t always happen. I believe a key factor to the successful use of key performance indicators (KPIs) is having the ability to take a step back and really think about what makes sense for your business. More importantly the significance of certain KPIs may change over time, particularly in the constantly evolving environment of a start-up. We often hear that a start-up is not just a smaller version of a big company. So don’t analyze it like one. Take the time to think about the factors that make a difference to your decision making.
Here at Conexia we are talking a lot about productivity. This includes productivity of teams, productivity of managers, and productivity of the directors. The team has worked incredibly hard at delivering quality products to its customers and has also been successful in expanding their reach internationally. This time of growth and change is the perfect time to be reassessing the way the business performance is analyzed. Below are a few of the KPIs that we initially discussed:
Gross margin (Contribution Margin) Gross margin equals gross profit over revenue. This ratio indicates the entity’s ability to produce a product or service at a low cost or to charge prices in excess of cost. Comparisons of gross margin ratios are particularly useful because they may indicate 1) a company’s ability to absorb cost increases from its suppliers (or price pressures from customers); 2) shifts in mix, competition, or project efficiency; or 3) financial statement errors.
Net income margin Net income margin equals net income (loss) after taxes over revenue. Net income margin is a relative measure of profitability which considers all costs including non-operating costs such as interest expense and income taxes. Trends in net income margin should be analyzed by components such as gross profit margin, taxes, and interest.
Project revenue vs. actual cost Project revenue in month vs. actual cost out in the month results in the net cash flow of a project.
Labor Cost Labor costs budgeted as compared to actual labor costs and staff mix generating labor cost.
Cash received vs. cash expected Cash received vs. cash expected is a measurement of project accounts receivable.
Consider KPIs that make sense for your business and they will give you new insight and perspective worth taking the time to develop.
Also, check out this awesome metrics resource from @bfeld due to come out in Q2 2013.