By Tony Hill
May 19, 2016
An integral aspect of business strategy is to define key metrics to meet and surpass business unit goals, and to then explore their interrelationship. It is imperative to first define the most important financial key performance indicators (KPI’s) and plan your entire strategy around them.
However, where is one to begin when choosing the right indicators amongst a seemingly endless array of financial data points? The reality is that your business cannot display all of these metrics on your dashboard. We’ve gone ahead and done this work for you, highlighting the 6 key KPI’s we believe are worth considering and tracking.
KPI #1: Net Profit Margin
You might be asking yourself why we didn’t choose Net Income, also known as the “bottom line” as the first KPI. While this figure is invariably the primary indicator for most companies, Profit Margin is often overlooked, and in some cases, calculated incorrectly. It is crucial here to first distinguish between Gross Profit and Net Profit, as the former is equivalent to total revenues less total product costs (also known as Cost of Goods Sold). Net Profit, on the other hand, also takes into account the remaining costs of doing business, including overhead, payroll, marketing and other key administrative expenditures.
Net Profit Margin is useful as a primary indicator on your financial dashboard, as it aggregates key data across all departments, and can change in real-time as you generate additional revenue or incur expenses.
Net Profit Margin: Tesla vs. General Motors
KPI #2: Actual vs. Budgeted Costs per Project
Since your company could be running multiple IT projects at any given time, this second KPI can provide powerful insight into how efficient each project is. Equipping managers or VP’s with this metric on their dashboard will enable them to allocate costs for new projects more efficiently and help maintain your company’s profit margin.
In addition, as real-time data streams arrive each day, you can easily monitor this ratio, compare it against both current and past projects of a similar type, and set benchmarks which will alert you immediately time if a project’s efficiency has dipped below a certain percentage threshold. By being proactive and monitoring this KPI on a regular basis, you will save your company money and potentially revise or kill highly inefficient projects right away instead of dealing with costs that you cannot recover.
Actual vs. Budgeted Costs: IT Projects
|Project Name||Actual||Budgeted||% Costs Allocated||% Completion|
KPI #3: Sales per Employee
This metric provides a look into both your company’s overall sales and the effectiveness of your workforce. As your company grows, you will likely hire more account managers, project managers and other key personnel, and you must ensure that the ratio of total sales to total workforce rises in parallel. If you begin to see this figure trending downwards during business expansion, you have the opportunity to review hiring practices, perform employee evaluations, and provide coaching to new hires to ensure they maintain productivity levels. Your custom dashboard can be updated to display the ratio of sales to the workforce in specific business units to highlight areas of improvement as well as top performers.
Sales per Employee: Apple vs. Amazon
|Company||2015 Sales per Employee||2015 Net Profit Margin|
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