How to Determine your Company’s Meaningful Key Performance Indicators
By Carolyn Hall
The first step in setting up the books of a business is identifying meaningful metrics. Whether it is a professional services firm or a real estate client, each business owner has individual views and preferences about analyzing the business.
Identifying critical key performance indicators (KPIs) upfront is important so that the accounting systems can be set up to measure the crucial aspects of a business. In addition, today’s technology allows access to so much information, and the reams of data can quickly become overwhelming. One of the challenges is figuring out how to avoid getting lost in all the numbers. In the end, the goal is to present an accurate snapshot of the financial KPIs, which will allow business owners to make proactive decisions.
Here are some examples of common metrics to consider.
- Geographical area. One common way to group data is by geographical area. Some business owners like to view a profit and loss by office location. Other professional service firms might see the value in isolating sales by their clients’ geographical location versus the office that generated the revenue.
- Productivity by individual. Do you want to measure output by partners or advisers? Or should you drill deeper to look at revenue by billing partner and/or originating partner? Which KPIs are the most meaningful when addressing the way you run your business?
- Location. In addition to determining whether it’s important to measure revenue by geographic location or by performer, you can take that metric a step further if you’re in the real estate business. Perhaps you’d be interested in looking at P&L by type of real estate investment (store, apartment building, strip mall, etc.), by geographic region or by individual unit. Or compare the achievements of individual landlords. Which data points are most meaningful to you?
- Service area. As the leader of an accounting firm, it might be fruitful to look at your auditing practice versus your tax practice. Legal firms might want to compare class action to municipal cases. Architectural firms could compare and contrast results generated by their surveying versus developmental work. This kind of information could be useful when determining what department the next hire should be in, or even in reconsidering your product mix altogether.
- Returns on investment. Advertising is just one example of a specific expenditure that can be closely examined for bottom-line effectiveness. You might examine it as a percentage of sales, or drill down even deeper to compare one medium with another (print advertising vs. online advertising, for instance). Or you could look at one media vehicle versus another, perhaps comparing the relative effectiveness of two websites.
- Expenditures by vendor. There’s a lot of useful information that might be gained by looking at this category. For one thing, it will tell you, in real time, where your money is being spent. As an example, you could learn that you’re spending dramatically more at one location or office supplier than with another. Perhaps there’s a good reason for that. Maybe this vendor is simply the most cost efficient or has the best service. But what if it’s just habit on the part of your purchaser, or your office manager is simply used to working with this supplier and has become complacent? Sometimes the reason can be less innocent; unusual spending patterns could indicate misappropriation of funds.
All of these items are good discussion starting points for a conversation with your accounting professional. Once you’ve identified the numbers that are important to you, you can work with your accountant to set up the metrics that will lead to meaningful financial KPIs. The result will be a dashboard for examining your company’s productivity in real time and receiving accounting reports that provide the key information to best analyze your business.