KPI For Growing Business
KPI For Growing Business
KPI For Growing Business
Key performance indicators (KPIs) are quantifiable Business leaders increasingly realize they can leverage
business metrics that track and measure an this information to make better decisions.
organization’s progress toward its strategic objectives.
The immense amount of information available to
More than just numbers, KPIs tell a story about how well
decision-makers today can also be overwhelming, so
a company is performing. Understanding KPIs as they
we pared it down to 20 widely used KPIs relevant to
relate to your industry, company, and even separate
most businesses. This business guide explains why KPIs
departments within a company is essential for any
matter, the characteristics of a good KPI, and provides a
growing business.
list of popular financial and operational KPIs.
1 2
Overview What Is a KPI? 10 Popular
Financial KPIs
3 4 5
10 Common How to Choose How Can Financial
Operational KPIs the Right KPIs for Software Help
Your Business With Setting and
Tracking Financial
Metrics and KPIs?
What Is a KPI?
A KPI measures a company’s performance against its average order fulfillment times, while others concentrate
primary business objectives. High-level KPIs focus on on employee or talent management metrics, such as
a company’s overall performance, while lower-level workforce retention and turnover.
KPIs focus on departmental processes, products, and
productivity. A company doesn’t need to monitor too KPIs fall into two categories: leading and lagging.
many KPIs — no more than 10 as a general rule. After Leading indicators predict what may happen in the
all, measuring everything clouds the picture of what future and offer businesses the opportunity to prepare
matters most to the organization. accordingly. For example, an increase in deal size or
employee headcount may portend revenue growth.
There are many different types of KPIs. Many focus on Lagging indicators reflect past results, measuring the
financial performance metrics, such as revenue growth aftermath of actions. Monthly recurring revenue and
rate and net profit margin. Others focus on customers, employee turnover are two examples of this type of KPI.
such as customer satisfaction or customer churn. Some Lagging indicators can uncover trends, help companies
KPIs measure operations, such as time to market and evaluate their progress, and influence future decisions.
They monitor
company health.
They reveal patterns
and trends.
They measure
progress
toward goals.
They uncover
trouble spots.
They indicate
whether a goal needs
to be adjusted.
While organizations need a firm grasp of what will 3. Operating Cash Flow
make them successful and which industry-specific KPIs Operating cash flow (OCF) is the amount of cash a
matter to them, there are metrics relevant to most company generates through typical operations. This
businesses. Here are 10 popular financial KPIs used by metric can give a business a sense of how much cash
growing businesses. it can spend in the immediate future and whether it
should reduce spending. OCF can also reveal issues like
1. Gross Profit Margin
customers taking too long to pay their bills or not paying
Gross profit margin measures the amount of money left
them at all. There are two ways to calculate it: the direct
over from product sales after subtracting cost of goods
and indirect method.
sold (COGS). A higher gross profit margin indicates the
company is efficiently converting its product or service
into profits. The cost of goods sold is the total amount Operating cash flow (indirect method) =
to produce a product or service, including materials and Net income + Depreciation and amortization – Net
labor. Net sales are revenue minus returns, discounts, working capital
and sales allowances.
Operating cash flow (direct method) =
Cash revenue – Operating expenses paid in cash
( )
Gross profit Net sales – COGS
margin = x 100
percentage Net sales 4. Current Ratio
The current or working capital ratio measures the liquidity
of a business to determine if it can meet its financial
2. Operating Profit Margin
obligations. A working capital ratio of 1 or higher means
Operating profit margin shows the percentage of profit
the business’s assets exceed the value of its liabilities.
a company makes from operations before accounting
Companies often target a ratio of 1.5-2, and anything
for taxes and interest. Increasing operating margins can
below 1 signals future financial problems.
indicate better management and cost controls within a
company. To find your operating profit, subtract COGS,
operating expenses, and depreciation and amortization Working capital ratio = Current assets /
from total sales. Current liabilities
Operational KPIs show how well your business is While the formula below is for total lead time, it can
running. Improved internal business processes and easily be adjusted to measure customer lead time,
metrics lead to more satisfied customers, which is supplier lead time, or production lead time. Also note
imperative for growing businesses. that manufacturing time only applies to companies that
make their own products.
1. Cost Per Unit
Cost per unit is how much a single unit of product
costs a company to produce or buy. It is best used in Cumulative lead time = Procurement time +
companies that manufacture or sell large amounts of Manufacturing time + Shipping time
the same product. Knowing the cost per unit helps
companies understand if they are making products in a
cost-effective manner, how to price products, and when 3. Cash Conversion Cycle
they’ll turn a profit. This metric tells you the length of time between when
you pay suppliers for materials and when your customers
pay for the final finished product. You want the cycle time
Cost per unit = (Total fixed costs + Total variable to be as short as possible. Tracking this metric will help
costs) / Number of units produced identify potential causes of cash flow issues. Although
this metric varies depending on what you sell and your
customer base, some of the most efficient companies
2. Lead Time have cash conversion cycles of less than one month.
Lead time measures the amount of time that passes However, it can be much longer, especially if you’re in an
between the beginning and end of any supply chain industry with long lead times.
process. This could be the time between a business
ordering a product from a supplier and receiving it,
between a customer placing an order and receiving it, Cash conversion cycle = Days sales outstanding
or between the start and end of a production process. + Days of inventory outstanding –
In that way, this KPI measures the efficiency of the Days payable outstanding
entire supply chain or certain steps within it. Lead time
is important because it determines the amount of
inventory a company needs to have on hand to fulfill
orders and therefore impacts stock availability and
customer satisfaction.
7. Cost of Stockouts
5. Sell-Through Rate Running out of some goods will be more costly to
Sell-through rate is a comparison of the amount your business than others. To measure the impact of
of inventory sold versus the amount of inventory stockouts, you can use the cost of stockouts metric.
produced or received from a supplier. Sell-through Companies can use this to calculate the money lost
rate is important because it helps you understand how when they run too lean or experience an unexpected
efficiently you’re selling through inventory. A high sell- surge in demand, leading to stockouts. The cost
through rate is positive because it means you’re moving of stockouts may also affect the amount of items a
product quickly. A low sell-through rate, on the other business keeps on hand.
hand, suggests you’re paying to stock excess inventory.
Tracking even basic metrics like revenue, expenses, and Business leaders must make it a
income can become cumbersome with spreadsheets
or other manual methods. It’s difficult to keep all this priority to pinpoint the KPIs that matter
information up to date, especially as a company grows most to their organization, monitor
and its transaction volume increases. That leads to
inaccurate information and, consequently, numerous
them, and continually adjust based on
other problems that could inflict lasting damage. what the data tells them.
Manually calculating more complex metrics, such as Back-end business systems with integrated reporting
some of the financial and operational KPIs discussed and analytics capabilities can go a long way toward
above, is even more challenging and error-prone. helping companies track these numbers and spot
Leading ERP systems like NetSuite collect all the changes that will have a positive or negative impact on
financial and operational data needed to calculate any their financial health. Growing businesses need a way to
and all KPIs your business might want to track. constantly check on these metrics, because they can be
NetSuite can display this information in dashboards that a deciding factor in whether they make it.
update in real time and automatically distribute reports
to all relevant stakeholders.
• Measure progress. By their very definition, KPIs measure progress on a company’s key business objectives. If a
company has the goal to increase annual sales by 20%, then KPIs like monthly sales growth and monthly sales
bookings can help it gauge progress toward that goal.
• Adjust goals and targets. Circumstances may change after a company establishes its goals. By monitoring KPIs
often, even daily, a company may realize an objective is unrealistic or no longer aligned with its revised plan.
This insight gives leaders a chance to rethink their plans to better match an organization’s goals.
• Identify problems to solve. Analyzing KPIs can uncover an issue that might otherwise go undetected. For
example, marketing KPIs related to the company’s website, such as a high bounce rate or a drop in daily active
usage, can signal that pages are loading too slowly or your site has broken links.
• Spot patterns. When these numbers are measured over time, such as month over month, patterns and trends
often emerge that can shape decision-making. If sales for a particular product aren’t growing, perhaps a new
marketing campaign is in order. If the rate of returns for a certain product has decreased over a six-month
period, that could indicate an issue with manufacturing.
• Pinpoint inefficiencies and cost-cutting opportunities. When KPIs are applied to business processes,
companies can more easily identify bottlenecks, resolve them, and reallocate resources. All of this should
boost efficiency and lift the bottom line. For example, if it takes five business days for inventory received to
be available to sell, then you may want to consider hiring more warehouse employees or moving to a new
warehouse management system to stock items faster. This should reduce inventory carrying costs and
expenses related to putaway.
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