The role of KPIs is to increase the velocity (the turnover rate) of your company’s financial ratios. Financial ratios are universal measures. They apply to any company in any situation.
A company’s Return on Equity (Net Income / Equity) can be divided into three key ratios:
- Operating Ratio = Net Income / Sales
- Investing Ratio = Sales / Assets
- Finance Ratio = Assets / Equity
Turnover is the name of the game. KPIs help improve your Balance sheet, Income Statement and Statement of Cash Flows. The faster your key financial ratios turn over, the better your financial statements will look. Look to your KPIs to accelerate your financial ratio turnover.
Financial Ratio Turnover Example:
A Construction Company that bills on a time and materials basis is experiencing a sluggish Investing Ratio. They investigate this, and they find that their Accounts Receivables are too high relative to their sales volume. Digging deeper, they find that their billing department has difficulties processing invoices. They work out the kinks in the process and establish the appropriate KPIs for the billing team.
Operating Ratio Example:
A Craft Brewery needs to revive its Operating Ratio. They identify three improvement initiatives:
- An agency relationship program to sell to restaurants and tap houses
- A Customer Profile program
- An e-Commerce initiative
They use KPIs to measure and manage the performance of each of these programs.
KPIs are a High Leverage tool. With the right KPIs, departments in your company will know what to focus on to accelerate your Financial Ratio turnover. A faster ratio of turnover creates better financial performance and better-looking financial statements.
At Rise, we serve owner-managed companies and draw on our 40 years of experience to help improve your financial performance. We use KPIs that will accelerate your Financial Ratio turnover. Call us for a review of your KPIs.
Previous Post: KPIs & Benchmarking
Next in the Rise Advisors Master Series on KPIs: Custom Designing a KPI Program
Your Business. New Heights.
Rise CPA provides professional accounting, tax and business advice to help you make the right decisions at the right time. Since 1979, we’ve been helping clients create businesses and lifestyles they envision by delivering expert insights and financial guidance. At Rise, we excel at advising business owners and their families in a caring and personal way. Our services cover a wide range of Tax Planning, Auditing, Accounting, Estate Planning, and Business Advisory. Please call (604) 936-4377 or use the online contact form to book an appointment with one of our accounting professionals.