Original content provided by BDO Canada.
Running your business is a 24-hour job. It's common for business owners to get carried away in business operations, which can often result in overlooking the importance of calculating and analyzing key performance indicators (KPIs). These KPIs can provide valuable insight into the health of your business and help you to determine problem areas.
There are many types of KPIs available to provide this insight, but we're focusing on ratio KPIs. We recommend regularly checking the following:
How are you financing your business?
Leverage ratios, such as debt-to-equity or interest coverage ratios, can provide valuable insight into how your company uses debt (also called leveraging).
Leveraging isn't necessarily an indicator of poor financial health. For instance, borrowing can be an indicator that the company has an increased demand for its products and is experiencing significant growth.
Once you have calculated your leverage ratios, you should assess whether your debt level is sustainable—BDO can assist clients with this process.
Can you meet your current financial obligations?
Liquidity ratios determine if your company can pay off its short-term debt obligations. In other words, how quickly can your company convert its assets into cash? The higher the ratio, the better? Not exactly.
An excessively high ratio could indicate that you could better utilize your assets to invest into the company.
After completing this analysis, you should consider whether you need to borrow or raise additional funds. Reach out if you're in this situation and need solutions.
Are you utilizing your assets effectively?
Turnover ratios (or activity ratios) such as asset turnover, inventory turnover, or receivable turnover all provide different insights into how efficient your company is in converting those assets into cash or sales.
Calculating these ratios over time can provide indications of seasonality or changing consumer preferences.
Once these ratios are calculated, you should look at how you can better manage your assets to increase revenues and make changes if necessary.
How profitable is your business?
Profitability ratios are the most popular ratio group. Profit margins and return on equity are best calculated on a consistent basis for comparison purposes and analyzed in conjunction with other ratios, such as those mentioned above.
Fragmenting the analysis by service type, product line, or department can yield even more valuable data to help transform your business for the future.
Look at your profitability ratios to find out what they tell you about your business growth and assess your company's competitive edge.
You should also consider the following questions:
- Why do clients delay signing contracts with my business?
- If one of my vendors goes out of business, how will it impact my company financially?
- Is my marketing plan yielding results?
- Can my cash flow support hiring more staff?
These KPIs can provide additional understanding—helping to empower your business to make decisions.
Have questions? Contact us