8 KPIs that Belong on Your Company’s Scorecard
Management guru Peter Drucker once said, “If you can’t measure it, you can’t improve it.” These words have stood the test of time in the business world, where key performance indicators (KPIs) are the unit of measure that many organizations use to assess, tweak and improve upon performance.
The reasoning is simple: KPIs help you compare against your company’s current performance and show you whether you’re achieving your goals (or not). Consistently tracking and measuring against KPIs also helps you pivot quickly, versus having to wait for a report to come out at the end of the month or quarter.
In most cases, KPIs are financial (net profit, liquidity), customer-focused (satisfaction, retention) or process-focused (measuring and monitoring operational performance). And where strategic KPIs reveal corporate performance at a high level, the functional kind are focused on specific departments within the organization. Operational KPIs analyse various processes, physical locations or corporate segments to come up with a picture of company performance month-over-month or even as granular as day-over-day.
Systems that generate a lot of useful data, enterprise resource planning (ERP) platforms can present challenges when companies want to turn that data into actionable steps. NetSuite rises above other ERPs by offering a wide range of dashboards and scorecards that support the real-time decision-making that companies need to compete effectively in today’s market.
NetSuite Puts the Power in Your Hands
In the current economic environment, organizations across most industries are paying closer attention to cash management, carefully tracking information in real-time in order to make decisions on the fly.
With NetSuite, managers and leaders can quickly view balance sheets, review profit and loss (P&L) reports and monitor cash flow right from their mobile devices. Having all of this information right in their “back pockets” helps executives make quick decisions without having to wait for a report to be generated.
NetSuite also provides more granular details like days sales outstanding (DSO), for a gauge on just how quickly your company is being paid for its products and/or services. On the flip side, you can also readily see whether your own suppliers are being paid promptly and adjust accordingly. These are just a few examples of how effectively NetSuite manages KPIs on your behalf and it’s all available right out of the box and without the need for customizations or integrations.
8 KPIs for Your Balanced Scorecard
To create a balanced scorecard for your organization, start by focusing on the 10 KPIs that address core measures like profitability, employee turnover and customer retention. Here are eight financial, operational and strategic KPIs that you can start using today to establish goals, develop a strategy for achieving those goals, evaluate your performance and make the necessary adjustments.
1. Debtors to Sales. This is a measure of how fast your customers pay their bills and the lower the ratio, the better. To calculate, just divide your total accounts receivable balance by total sales revenue. If it comes out on the high side—and if that’s impacting cash flow—it’s time to put some faster collection strategies into place.
2. Average Debtor Days. This is another accounts receivables (AR) KPI that pinpoints how many days late your customers are paying their invoices, on average. You’ll want to pay attention to this KPI because it’s usually a good indicator of a potential issue with bad debt. By taking proactive measures, you can avoid problems before they interfere with your company’s cash flow.
3. Net margin percentage (aka, “profitability”). This is your organization’s gross margin after business overhead expenses have been subtracted—or, its pre-tax profit. This is obviously an important KPI for all companies to monitor because it’s usually a good indicator of financial health and long-term sustainability.
4. Capacity utilization or operating rate. A KPI used to measure the rate at which potential output levels are being met or consumed, capacity utilization is calculated by dividing actual output by potential output. Then, multiply the sum by 100 to get a percentage representing your firm’s utilization rate. This KPI is particularly important in the professional services sector, where CFOs keep a watchful eye on their organizations’ high-level utilization rates.
5. Staff turnover. In today’s labor market, the length of time that your employees are (or aren’t) staying in place is an important metric to track. After all, retaining good workers is almost as difficult as finding and hiring them in the first place. Employee retention is the percentage of employees who remain at your company for a fixed time period and the KPI is generally calculated on an annual basis. Depending on the size of your business, you can also track retention for specific roles or teams if there are areas that need extra attention.
6. Inventory turnover rate. Inventory management metrics help you monitor and make good decisions about your stock. Your inventory rate or “turn,” for example, represents the number of times you sell and replace stock within a given period (usually one year). Your inventory rate will tell you if you have too much stock on hand versus what you’re actually selling. You can calculate your inventory turnover rate by dividing your cost of goods sold by your average inventory.
7. Days on hand (DOH). Also known as the average days to sell inventory (DSI), this metric represents your rate of daily inventory. Used to determine just how efficiently a company manages inventory dollars, DOH measures how many days it takes you to sell through your current stock of inventory. You can determine your current DOH by taking the average inventory for period, dividing by the cost of sales for period and then multiplying that number by 365.
8. Customer acquisition cost (CAC). This strategic KPI measures all of the marketing and sales costs that go into acquiring a new customer. You can use CAC to measure the efficiency of those processes and to make adjustments as needed. Calculate this KPI by adding the cost of converting prospects into customers (e.g., all of the marketing, sales and advertising efforts that went into it) dividing the sum by the total number of customers you acquired during a specific period of time.
Turning ERP Data into Actionable Intelligence
Today’s fast-paced business environment necessitates real-time decision-making that’s based on facts, not guesswork. With NetSuite as your foundation, you can leverage the system’s built-in dashboards, KPIs and metrics—all of which help you make sense of your ERP data and turn it into actionable intelligence. And once you have those measures at your fingertips and in real-time, you’ll be able to make more confident decisions faster than ever.