Key Performance Indicators

Key Performance Indicators (KPIs) are quantifiable measurements you can make that help you understand how your company is performing. An effective KPI has to be:

- measurable and well-defined.
- crucial to achieving your goals.
- applicable to your particular business.

When you think about the main reasons for company failure, they often come back to not being able to track how the company is performing. Without a defined method for measuring success and spotting issues, you might not see problems until they are critical. These financial performance indicators can help you monitor your results and gain a better overview of your company.

There are literally thousands of KPIs you could track and monitor. There are scientific calculators that are proven to predict insolvency. Which financial performance indicators should you be monitoring to ensure your company remains solvent? Does your company meet the Zscore test?

DEBT TO EQUITY RATIO

Formula: Liabilities / shareholder equity

This KPI measures the amount of equity in a business relative to its debts. It’s one of the most important financial performance indicators to consider when looking at your company.

CURRENT RATIO

Formula: Current assets / current liabilities

What ability do you have to pay out current obligations? Your current or “cash asset” ratio shows you in one simple formula – the higher the ratio, the more easily you can cover your current obligations. (As a guide, 2:1 is considered a desirable level, with current assets being more than double liabilities.)

While a high ratio is usually desirable, there are some factors that can mean it’s actually a detriment (namely, slow-moving stocks piling up, cash balances remaining idle). Any conclusions drawn from your current ratio need to take into account the nature of your business, your products, and seasonal fluctuations that may impact the result.

ACID TEST RATIO

Formula: (Current assets – Inventories) / Current liabilities

Also known as the “quick” or “quick assets” ratio, this KPI measures the short term liquidity of your firm. The higher the ratio, the better situation your business is in.

NET PROFIT MARGIN

Formula: Net profit / net sales

How efficient is your business’ cost control? The net profit margin reveals the amount of your revenue that is in actual profit. The net profit KPI can be a great tool to measure your profitability against other businesses in the same industry.

DEBT SERVICE RATIO

Formula: Earnings before interest and taxes (EBIT) / Fixed interest charges

What capability does your business have to service your long-term loans? The “debt service ratio” (also known as “interest coverage ratio”) shows how many times the interest charges can be covered by your company’s earnings.

DEBT TO TOTAL FUNDS RATIO

Formula: Total assets / total liabilities.

As a business, you have responsibilities under the Companies Act to remain solvent. This KPI can help you measure your solvency and ensure you’re not in trouble. It’s similar to the current ratio, but takes into account all assets and liabilities, not just those that are current.

Z SCORE CALCULATOR

Your Z Score is a formula that incorporates five key KPIs into a single score, in order to give a good indication of financial health.

- The Z Score is a scientifically based formula that measures how closely a firm resembles other firms that have faced insolvency and failure. It is not intended to predict insolvency, but rather uses probability in determining a company's financial state.
- The model uses five financial ratios combined in a specific way to produce a single number. This number, called the Z Score, is a general measure of corporate financial health.
- Discover your Z Score: Click here to take the test.

USEFUL TOOLS FOR BUSINESS PERFORMANCE INDICATORS

You can use these tools to help you set your own KPIs.

- Industry benchmarking: This tool from the IRD allows you to benchmark different KPIs against other businesses in your industry across the country. It allows you to zero in on problem areas.
- ANZ financial benchmarking tools: Simple tools to assist you in benchmarking your company’s performance against your industry and your competitors.
- ANZ Truckometer: This tool incorporates a set of economic indicators using traffic data around the country, and operates on a principle that demonstrates the correlation between traffic flow and economic activity.
- Data for business: From Statistics NZ, Data for Business pulls together business statistics to help you make decisions about your company.
- Break even point calculator: Handy tool to help you figure out how much you need to sell in order to break even and meet your overheads.
There are many other KPIs that may be valuable for your business to track – talk to your accountant or financial team about which might be most beneficial for your company.

Are you worried your business is heading for financial trouble? Contact us now to discuss your situation.

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