In part one, of our KPI series, we covered what KPIs (key performance indicators) are and how they guide business strategies. Now let’s take a sample KPI, break it down, and see it in action.
Primary KPI = Number of Days in Accounts Receivable
The number of days in Accounts Receivable affects your cash flow—and cash flow is a lifeline to a business. So again, a great KPI to track to increase cash flow is how many days it takes to collect on accounts receivable or A/R. Let’s say it is taking your clients 45 days or more on average to pay their invoices for your goods and services. We will set a KPI target to close the gap to 30 days after two billing cycles.
We have set our KPI or goal for customers to pay in 30 days or less. Next, meet with staff and brainstorm ideas for closing the payment gap. Pick the best option and begin implementing the new procedure.
Some strategies could include:
- Have your A/R department call all your 45-day-plus clients and offer them a credit card option or perhaps a payment plan to get their balance paid off quickly.
- Have your sales force offer new payment plans via credit card or discounts if the customer pays cash via an App or by check at the time of purchase.
Now that we have two strategies in place, we can track new KPIs. We could set the target at 50% of clients over 45 days to pay quickly and 50% of new orders or new clients paying by credit card or taking advantage of the cash discount.
KPIs are all about tracking data. If it can be measured, it can be tracked.
Collect the following data:
- How many 45-day-plus clients are on the books? In the 30-day period, how many accepted the offer to pay with credit card or payment plan?
- In the 30-day period, how many current and new customers were willing to pay at the time of purchase to receive a discount?
Review the results for the A/R KPI against the target and see if the strategies supported this goal.
Wash, Rinse, Review…Repeat?
Did the A/R number of day-to-collect decrease?
- If yes, then we could say the strategies worked, and we continue with A/R calls and sales reps offering alternative payment processing and discounts for cash payments.
- If no, we can review our secondary set of KPIs, the strategies that supported this goal.
A/R Department Collection KPI
KPIs for the A/R department: How many clients were A/R people assigned to call? How many customers agreed to the offer? Did the department meet the 50% goal? Based on the results, set a target to review in the next 30 days.
Sales Department Collection KPI
KPIs for the Sales department: To how many clients did they offer alternative quick payments? How many agreed to the offer? Did they meet the 50% goal? Based on the result, we set a target for this department for the next 30 days.
*Don’t forget to ask: Was cash flow enhanced?
More KPIs (key performance indicators) and Strategies for Improved Results
This example produced two new KPIs that relate to our primary KPI. We keep tracking until we reach our primary goal (cash flow). Once we reach that objective, we want to maintain that level. If, on the other hand, we want to improve our results, we can set new targets which may lead to new and improved strategies. If we aren’t getting the results we desire, then it’s time to create new strategies.
As you continue to use KPIs, each new target is created organically and becomes more specific to your business. As you can see with this example, one KPI leads to other key performances to track. Each new data point can create specific solutions to each problem area of your business or suggest areas for growth.
Recommendations and Conclusions
KPIs are more than goals. With each new target, strategies and procedures will be created and implemented. As your business grows, you’ll find that the power of using KPIs is in their ability to convert numbers and data into real-world business solutions.
KPIs are not static numbers; the data becomes dynamic and suggest actionable strategies and tactics to reach your ultimate business success.
*Pro Tip: Sometimes we get so involved in measuring and adding more and more KPIs that we forget to notice if we met our original goal.
Need help putting together KPIs in your business? Call your LSL CPAs Partner or accountant, or Contact us if you would like to talk about what to measure and how to do it.
key performance indicators