In the dynamic landscape of business, evaluating financial health is crucial, and while traditional financial Key Performance Indicators (KPIs) play a pivotal role, there exists a realm of non-financial KPIs that can be even more insightful in predicting future cash flow and profitability.
When faced with challenging times, the knee-jerk reaction often involves cutting variable costs such as wages, marketing, and staff amenities to boost short-term profits. Financial KPIs, including cash position, sales, gross margin, expenses, net profits, and unpaid customer invoices, provide a snapshot of a company's financial standing. These metrics are typically compared to budgets or historical periods to identify trends and potential issues.
However, relying solely on financial KPIs has limitations. Firstly, financial metrics can be complex for those without an accounting background. Secondly, they offer limited guidance on how to enhance and refine business operations.
While financial KPIs excel at alerting businesses to potential issues, they fall short in providing actionable insights to improve overall performance. For instance, addressing overdue customer payments is essential, but equally crucial is enhancing opportunities and refining activities to bolster customer satisfaction.
Unlike "lagging" indicators such as Sales, Outstanding Debtors, and Stock on Hand, "Predictive KPIs"* are visionary metrics that forecast performance. These metrics compel businesses and teams to align with the core purpose of their existence.
Selecting the right KPIs for your business is essential. While it's challenging to prescribe a one-size-fits-all approach, the following KPIs are commonly effective in identifying and addressing problems proactively:
- Velocity: Measures the time from order receipt to product or service delivery.
- Number of New Products: Tracks the introduction and sale of new products to existing and new customers.
- Customer and Staff Satisfaction: Gauges satisfaction levels through surveys, product returns, sales activity, and staff reviews.
A key recommendation is to focus on no more than three KPIs. Automate and prominently display these metrics on a large LCD screen in your office to foster transparency and alignment among your team. By incorporating both financial and non-financial KPIs, you can holistically assess and elevate your business performance.