Sept. 13, 2023

This paid piece is sponsored by Eide Bailly LLP.

A version of this article first appeared on EideBailly.com.

Clarity of purpose and mission is critical to determine measurements for success. Without an understanding of your overarching goals, it will be difficult to evaluate and tweak your metrics. It also takes collaboration — both within your leadership team and externally with trusted advisers.

Importance of KPIs

Once you have identified what success looks like and have a thorough understanding of your target market, you can begin to identify key performance indicators. Organizations of all kinds use KPIs to evaluate their performance across all levels of the organization. Doing so helps organizations determine next steps to improve or grow.

KPIs can benefit your business because they:

Ensure everyone’s on the same page.

KPIs give definition to where your organization is going. Defining these metrics and communicating them to your team gives an understanding of the company’s vision and direction. More than ever, communicating outcomes and measurements with your team will be a critical component to your business strategy.

Hold people accountable.

Your team must understand how their daily activities and work affect these metrics. KPIs need to be tied back to performance and the objectives for your functional teams. Furthermore, make sure someone is directly responsible for the success of each KPI.

Give you the path to move forward.

KPIs reflect the factors that are critical to your company’s success. By defining an overall goal, you can better align daily activities to the success of your organization. When you look at them daily, you can see where strategy changes need to be made.

A solid understanding of your KPIs will help inform your decision-making and move you forward. This understanding also will help you make decisions about the health of your organization and where to make necessary adjustments.

Helpful KPIs all organizations should measure

Small and midsize organizations tend to focus on a single financial statement such as the accounts receivable aging report or a balance sheet when evaluating customers, collections, operations and more. Though financial statements certainly contribute valuable data to the conversation, this is just a piece of the puzzle.

What you need is a healthy mix of the most meaningful KPIs at your organization to help fuel your decision-making and strategies. In an environment of increasingly limited resources, it’s important to know what success looks like and to track the proper metrics to achieve your overarching goals.

Financial metrics

Current ratio: Calculated by dividing current assets by current liabilities. This ratio helps paint a picture of your liquidity, or the speed and ease at which an asset may be converted to cash at your company. Lenders frequently use this ratio to understand your ability to pay bills.

Total asset turnover: Calculated by dividing sales by the total assets of an organization. It is an activity ratio that helps you understand your organization’s ability to manage balance sheets, accounts and revenue. The higher the ratio, the more effective the organization is at using assets to generate income.

Days sales outstanding: Calculated by dividing the accounts receivable balance by sales for a given period of time, then multiplying the answer by 30. This metric is used to determine the average time to collect receivables from customers to understand how many days of revenue are sitting in accounts receivable.

Days payable outstanding: Calculated by dividing the accounts payable balance by purchases, then multiplying the answer by 30. This metric is used to determine the average time to pay your vendors.

With both the days sales outstanding and days payable outstanding, you can understand how fast you’re collecting versus paying.

Days cash on hand: Calculated by dividing cash on hand by operating expenses, then dividing the answer by 365. It’s meant to reflect the number of days your organization would survive without revenue and continue to pay its operating expenses.

Nonfinancial metrics

Sales and customer metrics to follow include:

• New customers
• Repeat sales
• Customer retention
• Collection effectiveness

Looking at a customer level helps you see which customers require more attention and which show potential for a repeat sale. It takes a combination of several metrics to see the full picture.

It’s also valuable to look at marketing metrics, including:

• Website visits
• Facebook likes
• X followers
• Return on marketing investment

These nonfinancial metrics provide insight into other aspects of the company’s performance. With them, you can measure the reach to your customers.

Using KPIs to benchmark performance

Benchmarking, put simply, is measuring your organization against others. With it, you can better understand your current position to determine how best to proceed and improve your organization. It’s best to refer to data from organizations within your industry because they’ll have similar revenue and industry drivers, as well as organizations of a similar size to yours.

In determining which KPIs to include in your benchmarking program, there are a few best practices to consider:

1. Start with your strategic objectives. Your KPIs should be driven by your strategy. What key questions are you trying to answer, and what outcomes are you trying to achieve?
2. Determine how you’ll measure your KPIs. Do you have the tools necessary to gather data efficiently, or do you need to put new software in place?
3. Choose only the most important KPIs to avoid information overload. Narrow the tracked KPIs to a short, manageable list of the most meaningful metrics to report on regularly. Don’t simply track data that’s easiest to gather.
4. Implement technology to track and visualize KPIs. Identifying the technology you’re going to use to visualize your KPIs should be the last step in this process  because technology by itself does not create value from this data.

KPIs play a major role in determining your organization’s value. At Eide Bailly, we offer strategic outsourcing services across several areas to help drive growth and improve operations.