We are halfway through the calendar year and it’s an opportune time for businesses to assess how things are going thus far. While sales may be up, there are some other good key performance indicators (KPIs) to analytically help you evaluate how well you’re doing.
Here are four that can give you a solid snapshot of your midyear position:
- Gross profit: This will tell you how much money you made after your manufacturing and selling costs were paid. Calculate it by subtracting the cost of goods sold from your total revenue.
- Current ratio. This ratio will help you gauge the strength of your cash flow. It’s calculated by dividing your current assets by your current liabilities. If the ratio is too low (e.g., 1 or below), it may indicate you cannot cover debts and you need better cash flow. Don’t panic, however, the current ratio calculation is a current snapshot in time, not necessarily indicative of how your business may run year-round. You may have some outstanding receivables, or other short-term issues affecting it. You can easily rerun the calculation every couple of weeks or month to ensure the ratio is appropriate for cash flow. If not, contact us and we can advise you on potential improvements.
- Inventory turnover ratio. If you carry inventory, this ratio will warn you ahead of time if certain items are moving more slowly than they have in the past. It can also tell you how often these items are turned over. The ratio is calculated by dividing your cost of goods sold by your average inventory for the period.
- Debt-to-equity ratio. This ratio will measure your company’s leverage, or how much debt is being used to finance your assets. It’s calculated by dividing your total liabilities by shareholder’s equity.
You can customize your own KPIs too
The above ratios are more common, however, you can create your own and apply them to any area of your business.
For example:
- If your company’s goal is to improve response time to customer complaints, you could make a KPI to respond within 24 hours and to resolve at least 80% of complaints to the customer’s satisfaction. Response times and documented resolutions can be tracked and once established, you will be able to calculate the KPI.
- Your business wants to improve its closing rate on sales leads. The KPI could be to convert 50% of all qualified leads into customers over the next six months with the goal of raising this percentage to 60% next year.
Note that KPIs are both specific and measurable. General statements such as “to provide better customer service” or “close more sales” won’t produce a sound KPI.
Plan for the next six months
Midyear is the perfect time to stop and objectively assess your company’s performance. If things are on track, you can determine why and keep that momentum going. If things are not going well, you can adjust your budget and objectives accordingly.
Our professionals are excellent at helping businesses look at various applicable KPIs as well as help you apply that data to good business decisions. Give us a call and see how we can help your business be better.
Dalby, Wendland & Co., P.C., office locations – serving western Colorado:
Grand Junction (970) 243-1921
Glenwood Springs (970) 945-8575
Montrose (970) 249-7701
