Discovering and tracking the KPIs, KRIs, and PIs in your business can be a difficult task. Earlier, this year, I began the task of solidifying, strengthening, and condensing the KPIs within my own businesses. Let me tell you, I now have a much greater appreciation for the business coaches and advisors that simplify the process. As I’ve gone through this journey, I’ve made it my goal to be as transparent as possible, revealing what takes place behind the scenes. I’d like to continue this series with a look into the finance KPIs at Heritage.
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If you haven’t followed along with this blog series, I encourage you to take a look back. Up to now, I’ve shared some of the insights and wisdom of many of our Heritage team members, focusing on the various indicators they track in their respective departments. We’ve taken a close look at the 8 key areas of our business and broken down the metrics for each one.
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At this point, we’ve looked at these indicators from a holistic point of view, as well as the KPIs for marketing, sales, leadership, and planning. When I asked my team who I should talk to about the finance KPIs, they all said that I should be the one discussing finance. Although I’m not solely responsible for tracking the list of 40+ indicators in our finance department, I do check them on a very regular basis.
Like the other 8 key areas, finance has past, present, and future indicators to draw information from. For example, a past performance indicator that we track is revenue growth. We look at our net operating income growth and profit margin growth over time to see where we’ve been versus where we are. An example of a present performance indicator that we use is our budget variance. What are our actual numbers versus what we projected? Finally, we look to the future with our forecast revenue. This gives us an idea of expenses that we may need to plan for as we grow.
If I were forced to narrow the list of indicators in our finance department down to just two KPIs, I would begin with revenue vs. forecast. This is our total revenue and predicted number of clients multiplied by the average deal size. When we do this math, we get our forecast revenue. We know, based on our contracts and meeting schedules, the amount of revenue that we are working with, in each quarter.
For example, if we have 10 clients this quarter, we may look at that and decide that we want to see 12 clients in the following quarter. Additionally, we want those 2 extra clients to have an increase of 20% over our current revenue. So, we can look at the revenue that we’re forecasting and determine whether we actually met our forecasted numbers. Why is this such an important KPI?
Revenue is the lifeblood of your business. Tracking it is like monitoring vital signs. To effectively manage your business operations, you also need to have a forecast. Tracking revenue against your forecast allows you to see the big picture of how you’re performing. If you’re off track, you know you need to dive in and start fixing problems. If you’re at or above your forecast, look to see what can you optimize, to do even better.
In my business, there is a lot of work to do within the first 90-120 days after we receive a new client. Therefore, I need to already have the proper number of planners on staff to handle the flow. By tracking revenue vs forecast, I can see if I need to hire another associate, senior planner, or even outside consultants.
The other finance KPI that my business just couldn’t do without is our profit margin percentage. That’s your income minus your expenses. At Heritage, we want our profit margin percentage to be at or better than 20%. That’s above operating expenses. It’s above the owner’s distributions. But why? Well, reaching our desired profit margin fits our long-term goals. I have a vision that the company should be owned by the employees.
I know there are several of you who just spit sweet tea all over the place when you read that. However, it isn’t uncommon, in my industry, for planners to own the business. I want my team to be able to participate in this. In order for that to happen, we need to run a 20% profit margin. I track this KPI along with our COO and CFO, Amy Ahrens. We track this consistently on a quarterly basis, using Quickbooks and a plugin called Fathom. We are so committed to this that it actually goes into the bonus structure for our team.
As I said earlier, there are over 40 KPIs, KRIs, and PIs that we track in the finance department at Heritage. However, there are five of them that I believe every business owner should be tracking, regardless of your industry. These are the five indicators that truly give you a clear picture of how your company’s finance department is performing. So, what are they?
This indicator is designed to measure the percentage of change in Earnings Before Interest and Taxes (EBIT) for a period. The EBIT growth indicator is looking at a combination of growth in revenues and growth in profits, presenting a balanced measure of growth. Essentially, this will tell you if your earnings are moving in the right direction.
Next, is revenue growth. This indicator kind of coincides with your EBIT growth indicator but revenue growth is really looking at the top-line revenue. For my simple mind, I like to look at revenue growth because it allows me to see the growth of each of the revenue sources that pour into my businesses. EBIT looks at all of your earnings together. Revenue growth looks at each source individually.
As business owners, we often think that our businesses are the greatest asset in existence. I’m guilty of it, sometimes. I will look at my business and think that I can make a greater return by investing in my business than I could from the stock market or even real estate. However, we really don’t know what the return on our equity is. Return on equity measures how effectively the business has used the resources that the owner has given to generate profits.
Return on capital employed (ROCE) monitors the relationship between the capital (‘inputs’) used by the business and the earnings (‘outputs’) generated by the business. ROCE is arguably one of the most important performance measures. The higher the result the greater the return to providers of capital. It is a measure of the efficiency and profitability of capital investment (i.e..funds provided by shareholders & lenders).
This one measures how much the actual budget varies from the projected budget. In order to track this KPI, measure how close the baseline amount of expenses or revenue is to the expected value. I had a client, recently, who had a piece of equipment roll over and the motor caught fire. That was a $15,000 unexpected expense. Something like that will definitely cause your budget to be out of whack for a quarter. So, one of the things I really like to look at is the budget variance. You have your budget in place, how did you do in terms of sticking to it?
Friends, this is just a glimpse of what our finance KPIs look like. With more than 40 indicators to track, it’s important to know when to check them and which ones are truly key to your success. Fortunately, there are plenty of tools like Quickbooks and Fathom to help you track them within your own business. But, if you find that you’re still in the weeds or if you have an area that is consistently underperforming, reach out to us. We do this on a daily basis and would be happy to help you.
Look, I know life is hard, but it’s still just so good. Trying to keep a handle on 40+ finance KPIs can be frustrating. But it doesn’t need to be. With the right tools and a great support team, you can make your finance KPIs at least, financially simple. Let’s go out and make it a great day!
If you’re interested in learning more about the KPIs that measure your business’ health or if you need help establishing them, reach out to us. The team at Financially Simple is here to help.