From the baseball field to the boardroom, statistical analysis
has changed various industries nationwide. With proper preparation and
guidance, business owners can have at their fingertips a wealth of stats-based
insight into how their companies are performing — far beyond the bottom line on
an income statement.
The metrics in question are commonly referred to as key
performance indicators (KPIs). These formula-based measurements reveal the
trends underlying a company’s operations. And seeing those trends can help you
find the right path forward and give you fair warning when you’re headed in the
wrong direction.
Getting started
A good place to start is with some of the KPIs that apply to most
businesses. For example, take current ratio (current assets / current
liabilities). It can help you determine your capacity to meet your short-term
liabilities with cash and other relatively liquid assets.
Another KPI to regularly calculate is working capital turnover
ratio (revenue / average working capital). Many companies struggle with
temperamental cash flows that can wax and wane based on buying trends or
seasonal fluctuations. This ratio shows the amount of revenue supported by each
dollar of net working capital used.
Debt is also an issue for many businesses. You can monitor your
debt-to-equity (total debt / net worth) ratio to measure your degree of
leverage. The higher the ratio, the greater the risk that creditors are
assuming and the tougher it may be to obtain financing.
Choosing wisely
There are many other KPIs we could discuss. The exact ones you
should look at depend on the size of your company and the nature of its work.
Please contact our firm for help choosing the right KPIs and calculating them
accurately.
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