Key Performance Indicators (KPIs) can take the form of accounting ratios or non-financial measurements such as lead time from order to shipment or sales call/visit conversion.  Accounting ratios provide a consistent form of measurement to help you better understand financial statements (both yours and other peoples's), they can help you identify existing problems & potential risks for your business.

Looking at your profit & loss account tells you if you are making a profit but it will not identify how you are performing against your competitors or whether additional sales as are profitable as existing sales or whether you are managing stock levels effectively. Accounting ratios provide the tools to measure such performance. When comparing your business you should always make sure you are comparing like for like. Some accounting ratios can be misleading when used in isolation, so always use a combination of ratios. It is important to make timely reponses to changes in KPIs by investigating the underlying causes and taking action to resolve the issues identified.

It's a good idea to prepare management accounts that are relevant to your business, if you don't have the relevant internal resources then we can help you with that. We provide an accountancy service tailored to your needs got to our Accountancy page for more details.

To maximise the benefit of utilising KPIs it's a good idea to set goals and targets that are specific to your business. These will usually be a combination of financial & non-financial targets, although most non-financial targets usually have a financial consequence. Here are a few examples of non-financial targets:-

• Un-invoices Sales at month end - (if you don't bill within a day or so of "delivery" then cashflow is affected).
• Lead time from order to delivery - (key to customer satisfaction)
• Sales conversion rates - ( % of sales calls/ visits conververted to actual sales, is your pitch right?)
• Complaint/enquiry resolution times.
• Staff turnover rates.
• Staff replacement costs.
• Production defects figures.
• Customer returns.
• Utilities costs per product/employee
• No. of accidents/ injuries per period.

Of course, the KPIs that you choose will be dependent on your ability to accurately and consistently collect the data on a regular; so that you can make the necessary comparisons. It is important to limit the number of KPIs to those that will have the most impact on your business/decision making. After all if you spend too much time collecting, comparing & monitoring data the chances are you will not have time to investigate and action any issues arising. Use the SMART methodology to help choose your KPIs:-

• Specific - to your business
• Measurable - you can collect the necessary data
• Achievable - set achievable targets
• Realistic - targets & measures must be realistic given the resources available & within reasonable timescales .
• Time-based - Set measures based on your business cycles, some measures may be weekly such as production errors or monthly such as stock turnover

Profit Measurement Ratios

 Gross Profit Margin

Gross profit margin% = (gross profit £/ Turnover £) x 100

An easy to calculate & monitor percentage which can be easily measured against competitors. Changes in this ratio might indicate changes in the cost of direct input costs such as materials or labour or the efficiency of labour or material usage/yield.

• Break Even Point

Break Even Point = fixed expenses/ gross margin%

This will produce a £ value which is the turnover you need to break even given the current gross margin % that you are achieving. Fixed expenses usually refers to overhead costs. 

• Net Profit Percentage

 Net Profit % = (Net profit £ / Turnover £ ) x 100

Investigation of movements in this ratio can be more complicated due to the number of elements involved and for this reason it is also more difficult to compare against a competitor.

•  Return on Assets

 Return on assets % = (Net profit £ / Net assets) x 100

This ratio measures the return on the capital employed in the business, movements in this ratio can help identify how hard you are working your assets i.e. are debtors or stock too high? Are you taking full advantage of supplier credit terms available to you? Is the return acceptable given the level of profit vs. other forms of investments?

Liquidity Ratios

•  Current Ratio

Current Ratio = Current assets £/ Current Liabilities £

This ratio indicates whether a business is able to meet its current liabilies, also known as 'Creditors Cover'

• Quick Ratio (Acid Test)

 Quick Ratio = (Current assets - Stock) £/ Current Liabilities

This measure indicates a business's ability to meet its immediate liabilities, it excludes stock because stock can take time to convert to cash. 

Control/ Performance Ratios

• Debtor Days

Debtor Days = (Debtors £/ Turnover) x 365

This is a measure of how quickly a business is collecting its trade debts, cashflow and working capital management is essential for a successful business. If you have different terms for different customers, you will need to take into account any changes in customer mix when comparing debtor days figures.

• Creditor Days

Creditor Days = (Creditors £/ Purchases £) x 365

This ratio indicates how long it takes a business to pay it's suppliers. if you are paying creditors too quickly compared to the length of time it takes to collect your debts, it will have a negative impact on cashflow. Extending the time taken to pay creditors should be balanced against the possible impact on pricing & deals from suppliers.

• Stock Turnover Ratio

Stock Turnover = Cost of goods sold £/ Stock £

This is a measure of how quickly a business converts stock into sales, it can also be expressed in the from of days.

Stock Turnover Days = (Stock £/ Cost of Goods Sold £) x 365

This form of the ratio is often easier to interpret and when added to debtor days shows how long it takes to convert stock into cash. 

Back to Business & Tax Zone or Home

Office Hours:

Monday - Friday 08:00 - 21:00

Saturday 10:00 - 14:00

If you have any queries please contact us:

Tel:  0113 418 2058

Mob: 0779 4734711 (text Name & Address followed by "CISPACK" or "SATPACK") & we will send you a CIS Tax Return or Self Assessment pack.

Email: enquiries@cismadeeasy.co.uk

Alternatively, please use our contact form.

Use of this website is subject to & governed by our terms & conditions of use and privacy policy.