Benchmarking has always been a best practice for businesses and organizations. Identifying and analyzing metrics that are important to your operation and comparing them to peers and those in your industry allows you to craft realistic goals, maintain team accountability and plan for the future.
The significance of identifying what success looks like first cannot be overstated. 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 advisors. In a time of uncertainty, it’s important to have people who challenge you to think differently and to question your goals and metrics for success. A trusted business advisor should be able to have a strategic conversation with you and give you constructive feedback on your proposed strategies.
Success is also contingent on understanding who your product or service is for and addressing the problems they face.
Having a clearly defined, reasonably sized target market can allow your business to put time and effort into those who are interested in the business, especially during a time when many are looking at cost containment strategies. Without having a clear picture of who your target market is, you may be wasting time, money and energy on the wrong people—people who won’t even think about buying your product.
Once you have identified what success looks like, you can begin to identify key performance indicators (KPIs) that work for your organization. KPIs allow you to quantify what success means to your business. They are measurable, so you can track what you’re currently doing and what action you need to take (or not take.)
Organizations of all kinds use Key Performance Indicators (KPIs) to evaluate their performance across all levels of the organization. This includes organization wide, individual project, activity, product line, location and more. Doing so helps organizations determine next steps to improve or grow. It also helps teams understand and work toward strategic goals.
KPIs are quantifiable measurements, agreed to beforehand, which allow you to identify what success means to your business.
Learn more about how KPIs can impact you from our recent webinar.
A solid understanding of your KPIs will help inform your decision making and move you forward. This understanding will also help you make decisions about the health of your organization and where to make necessary adjustments.
Small and mid-size 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 have their place and certainly contribute valuable data to the conversation, a single financial statement by itself it doesn’t tell the whole story. It’s 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.
The Current Ratio is 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. The higher the ratio, the greater your ability to pay.
Total Asset Turnover
Total Asset Turnover is 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, and to show how efficiently you’re using your assets. Investors often use this metric to determine the likelihood of a good return on their investment in a certain organization. The higher the ratio, the more effective the organization is at using assets to generate income.
Days Sales Outstanding
Days Sales Outstanding is calculated by dividing the accounts receivable (AR) balance by sales for a given period of time, then multiplying the answer by thirty. This metric is used to determine the average time to collect receivables from customers in order to understand how many days of revenue are sitting in AR. Be sure to only use credit sales in this calculation, as same-day sales can skew this number.
Days Payable Outstanding
Days Payable Outstanding is calculated by dividing the Accounts Payable (AP) balance by purchases, then multiplying the answer by thirty. This metric is used to determine the average time to pay your vendors. To get an accurate metric, you must know what types of payables are in AP, such as rent or payroll, which can skew the calculation.
With both the Days Sales Outstanding and Days Payable Outstanding, you can understand how fast you’re collecting versus paying.
Days Cash on Hand
Days Cash on Hand is calculated by dividing cash on hand by operating expenses, then dividing the answer by 365. It is meant to reflect the number of days your organization would survive without revenue and continue to pay its operating expenses. Be sure to exclude non-cash expenses, such as depreciation.
The benefits of solid financials become clearer when we’re strategizing for growth and change. A little help from an advisor can go a long way.
Sales and customer metrics to follow include:
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. Software available today, such as Power BI or Tableau, can help you pull data from your system and generate meaningful reports.
It’s also valuable to look at marketing metrics, including:
These nonfinancial metrics provide insight into other aspects of the company’s performance. With them, you can measure the reach to your customers and which marketing efforts get the most engagement.
Finally, some of the most effective metrics are those that mix financial and non-financial data. These are KPIs you design to fit the financial and operational standards for success in your industry. The key is to identify the production metric that is key in your industry, such as charge hours in accounting. Examples include:
Once you have your KPIs measured, you must benchmark them against your past performance and that of other organizations to understand if these measurements are poor, sufficient or above average.
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.
As you review and create KPIs, ensure you are surrounded by advisors whose end game is to help your organization become better and pursue its metrics for success.
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, as they’ll have similar revenue and industry drivers, as well as organizations of a similar size to yours.
Benchmarking resources like online databases that acquire data across organizations, allow you to drill down within each industry, by revenue size or asset size. The information is derived from users of resources, public data like the IRS, and company statements. You can look not only within your industry, but also at entities that are comparable in size to yours. When you use such resources, make sure you understand where the information comes from and how many respondents are involved.
Industry groups and publications are also great sources of financial and nonfinancial data. If they aren’t available to you, be sure to measure those metrics internally and use them as a point of comparison in a monthly or annual analysis.
In determining which KPIs to include in your benchmarking program, there are a few best practices to consider:
KPIs play a major role in determining your organization’s valuation.
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