This is the final article of our four-part series about budgeting and forecasting. If you’re new to our blog, you might want to check out budgeting in business, budgeting strategies, and forecasting in business before you read about KPIs and metrics.
We can determine how effectively a business is meeting its goals by determining key performance indicators (KPIs) and metrics.
KPIs are quantifiable measures that can be used to gauge success over time. They are defined based on core business objectives.
“Key performance indicators should be clear and always relate to a specific business outcome or objective,” explains Kerry Foster, Finatics VCFO. She cautions that KPIs must be shared with those who are going to help the business achieve the desired outcome.
“Not sharing your KPIs with those involved may have them focusing on different areas of business that are not going to lead to the intended goal or result of the KPI.”
Some questions you might ask when trying to determine a KPI include things like:
- What is the desired objective?
- Why is this outcome important?
- Who is responsible for it?
- How can you tell when you’ve achieved it?
For example, a nonprofit organization might have an objective to increase charitable donations by 25% this year. If this target is achieved, the nonprofit will have the next year’s operating budget in place. The Director of Fundraising is responsible. Progress will be reviewed monthly.
Metrics are also quantifiable measures, but they are used to track the success of specific business processes. They can help to evaluate performance and compare results.
Some examples of metrics by department could include things like:
- Cost-per-acquisition (Public Relations)
- Sales by territory (Retail)
- Sick time (Human Resources)
- Lead conversion ratio (Sales)
Essentially, metrics are different from KPIs because metrics track processes while KPIs assess whether your business is hitting objectives or targets.
“Along with the financial reports, KPIs should be able to paint a picture as to how the business is performing,” explains Kerry.
Have you heard of SMART goals? Ensuring your KPIs meet this criteria is very helpful:
Relevant to your business.
Time-frame well defined.
Many businesses will use a five-step process to make KPIs actionable:
- Review the business objective.
- Look at relevant metrics to analyze current performance.
- Set short-term and long-term KPIs so that there are milestones to achieve as you strive to reach the long-term goals.
- Discuss the KPI targets with staff who are involved in these areas.
- Review progress and make adjustments as required.
If figuring out KPIs and metrics sounds like a bit much, remember that outsourcing your accounting is a way to access the financial expertise of an accounting team and Virtual CFO.
At Finatics, we use an integrated reporting software called Fathom that provides customized management reporting, analysis, and forecasting. It allows accountants and business owners to easily monitor and assess business performance and identify areas of opportunities.
Fathom also provides timely KPI and Metrics Reporting so you can gauge the business performance during the month. It’s important to note that this is only as good as the data and how up to date it is. When it’s done well, it’s very helpful for identifying areas that need focus or those that are performing better than expected.
Not only does Fathom allow for customizable and trackable KPIs, it provides a dashboard of key measures. It incorporates budgeting and forecasting so that you can analyze business performance — and non-financial data can be included in the reporting.
“Forecasting within Fathom can be quick and simple or more in-depth and provide scenario planning, depending on the size of the business and the business owner’s wants and needs,” explains Kerry.
“Organizations like it because we are able to provide clear reports with valuable and easy to interpret information. We are also able to include charts and explanations within the reports.”
Interested to learn more about having a virtual Accounting Team to help with KPIs and metrics? Please contact Finatics Accounting Solutions for a complimentary consultation.