It’s critical for small- and medium-sized businesses (SMBs) to make sure they’re performing up to their potential. The key to this is using financial accounting software to track measurable goals, or key performance indicators (KPIs).
But with so many metrics available to track, where do you start? How do you know which KPIs to track in order to make strategic decisions regarding resources and staffing? Simply put, there are six KPIs you need to track — revenue per employee, days sales outstanding, days payables outstanding, cash from operations, EBITDA and return on capital employed. Here’s a breakdown of each KPI.
- Revenue per employee: This metric is self-explanatory, but it’s important to note that this KPI is most useful when compared against other companies in the same industry. Ideally, your company wants the highest revenue per employee possible because it means they’re more productive.
- Days sales outstanding: This is a measure of the average number of days that a company takes to collect revenue after a sale has been made. Due to the high importance of cash in running a business, it’s in a company’s best interest to collect outstanding receivables as quickly as possible. By quickly turning sales into cash, a company has the chance to put the cash to use again. Ideally, the cash is reinvested into the company to make more sales.
- Days payables outstanding (DPO): This can also be used to compare one company's payment policies to another. Having fewer days of payables on the books than your competitors means they’re getting better credit terms from their vendors than you are from yours. If a company is selling something to a customer, it can use that customer’s DPO to judge when the customer will pay (and thus what payment terms to offer or expect).
- Cash from operations: Operating cash flow is important because it indicates whether a company is able to generate sufficient positive cash flow to maintain and grow its operations, or whether it may require external financing.
- Earnings before interest, taxes, depreciation and amortization (EBITDA): This is essentially net income with interest, taxes, depreciation and amortization added back to it. EBITDA is often used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.
- Return on capital employed (ROCE): A higher ROCE indicates more efficient use of capital. ROCE should be higher than the company’s capital cost. If not, it indicates that the company isn’t employing its capital effectively and is not generating shareholder value.
The best way to track these KPIs is by using dashboards, which are a major part of a quality financial accounting software application. Many ERP solutions now offer ways to create dashboards for a specific employee or by role. What’s most important is that employees are able to set up and configure dashboards without the help of the IT department. This means employees are empowered to make progress all on their own. Plus, your IT staff is freed up to perform more critical and technical work that moves the business forward.
It’s important that your KPIs are able to be built and graphically represented in your ERP platform. For companies working with QuickBooks or spreadsheets, moving to a more sophisticated solution such as a powerful financial accounting software package is a critical first step in properly tracking KPIs.