As a business, you have to track and measure your performance in order to succeed. Developing Effective KPIs that work for your business (KPIs) is the way to go for all businesses.  A KPI allows you determine goals, set objectives and evaluate progress over time throughout your business. KPIs may differ based on industry, but there are some fundamental metrics that apply across the board.  In this week's I Hate Numbers podcast I discuss Effective KPIs that work for your business.

The key performance indicators discussed today should increase the understanding of effective KPIs. Having clarity on cash flow, gross margins, break-even, receivables collection period, inventory term, payables payment period, working capital cycle, customer lifetime value and conversion rates is important to the success of a business.

Having Effective KPIs that work for your business drives growth and efficiency. Knowing when target KPIs are being met as well as spotting potential problems early will ensure business owners are always ahead of the game. Therefore, every business owner should be familiar with these key indicators for increased success. If you would like to learn more about effective key performance indicators for your business make sure to subscribe to my I Hate Numbers podcast for regular advice and tips that are easy to understand and accessible to everyone from experts to beginners in business.  Subscribe now!

Conclusion and good to know

The I Hate Numbers podcast isn’t just about financial performance though.  Other topics are covered, for example, cash flow management, budgeting, forecasting, tax, accounts, and more! Every episode provides actionable advice from me, Business Finance coach, accountant and educator who explains that stuff in an easy and no-nonsense way.

Are you a small business owner, social enterprise or organisation passionate about change? Managing your finances can be a lot of work, trust me.  Finally, there’s software that makes keeping track of your cash flow and financial planning easier: Numbers Know How. It helps you stay organised so you can focus on what matters to you; the creative work and the impactful change. Take a step away from the chaos with fast setup & easy navigation – numbers just got real…for the better! Get organised & make sense of it all with Numbers Know How today!

In last week's podcast, I looked at five things you need to take on board when you are measuring your business performance. Building on last week's podcast, I wanna share with you 10 KPIs that are really useful when times are challenging, when things are looking a little bit on the bleak side ahead. And these 10 KPIs,

by the way, folks are ones that you should have as a standard, and when prosperity beckons, when things are looking good and rosy, you should be keeping an eye on these 10 KPIs nevertheless. It's important from a financial perspective to keep an eye on cash flow, profitability costs and risks. As I go through and share these financial KPIs with you, remember, we need non-financial KPIs as well.

We need the non-financial indicators to complete the picture to give us a more rounded view of what's going on in our business.

You are listening to the I Hate Numbers Podcast with Mahmood Reza, the I Hate Numbers Podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Let's start with the financial ones. Cash flow is vital. Cash is the lifeblood of your business. A lack of cash means that you will not be able to survive, you will not be able to continue. And for me, one good, nice simple measure is to look at the level of what I call operating cash flow is in your business.

So if you have your bank statement in front of you, look at that bank statement. Make sure you look at the figures money in the bank that represents money after putting aside things like taxes that you are collecting, and what you want to make sure is that you've got a buffer of minimum three months you're aiming for, worth of cash flow that will cover those costs, that if your business was inactive, customers weren't buying from you.

You are taking some time away to develop new products and services, but you've got three months worth of operating costs covered by your cash balances. If not, that is a target you should be selling yourself. Remember, cash is that vital commodity. It's your life jacket to keep you afloat. It's your life jacket to keep you going towards the shore.

Revenue is a vanity measure and it's a vanity measure for good reason. As part of the cash flow measures, there's three numbers that I'm gonna share with you, which together constitute what's called a working capital cycle. Many of us in business will be transacting, will be selling goods for credit, where we give customers time to pay.

We'll be buying goods from suppliers where we have time to pay, and we may have items of what we call stock or inventory. So if you're a service business, you may have what's called work in progress, incomplete work. If you're a manufacturer or a retailer, you'll have physical stock as well. Now, the working capital cycle goes as follows.

Now working capital is the ATM of our business. It's the sale of services, the sale of goods, it's the stock being sold on to somebody. It is generating the cash from that cycle that helps pay for the operating costs and the running costs of our business. So we need to make sure it's as healthy as possible.

Now, the first number in that working capital cycle is called debtors collection or receivables collection. What it in essence tells us is how long do we have to wait to get paid from our customers the moment the invoice is issued. Ideally, we're looking for as short as possible, but let's look at the calculation

first of all. We take the figure that represents the outstanding customer accounts we have i.e. our level of debtors or receivables, and we divide that by the level of credit sales and multiply that by 365. We then have something called payables period, or creditors payment period. It's the same concept, but it's applying to us how long we'll take to pay our suppliers. In the similar way,

we do the calculation. We look at the level of trade payables or trade creditors, if you want an old-fashioned term divided by the level of credit purchases and times up by 365. If that data isn't immediately available to you, the news cost of sales is set at credit purchases, and don't forget to multiply by that 365.

Now, inventory turn is how quickly we sell stock, we empty a fictional warehouse and replenish it. Now you can use this same calculation methodology if you've got work in progress. We take the level of inventory, outstanding, the value of that inventory. We divide it by the cost of sales, and again, we multiply that by 365.

Now, let's imagine some numbers that we've calculated. So we got debtors collection at 40 days, we've got inventory days at 20, and we've got creditors payment period or payables at 30. So full G plus 2060 offset by the 30 days we're taken to pay supplies. That gives us a 30 day working capital cycle, and that's how long we have to finance, waiting for customers to pay us and our inventory going through the door.

And we need that level of investment in our working capital. So we've covered four of 'em, aren't we folks, we've looked at cash in the bank, the cash flow operating cycle. We're now gonna look at something called gross margins. Now, gross margins, if you visualize this, the products that you sell, the services you provide

generate a level of gross margin, a level of gross profit. That in itself then serves and covers the operating cost of our business. We wanna keep the gross margins at a good, healthy level, and we can measure that in power note terms, but measuring it in percentage terms is also in insightful. So measuring the level of gross margins, gross profits is vital

to know that we've got sufficient generated to cover all our operating costs. The next number that we should do, this is number six in the hit parade, is breakeven. Now breakeven is that point where we neither make a profit or nor do we lose money. It's what we might call washing our face. Breakeven covering all the costs.

Anything above breakeven is obviously gonna be positive and it's gonna be straight profit. Anything below that, and it's probably a different scenario that we're looking at. Now folks, I'm gonna just explain the calculation and if you're thinking these are a lot of numbers, Mahmood and calculations to take on board,

please do check out the show notes and I've got a link to some calculators, which will take some heavy lifting away from you. Now breakeven, we look at the level of gross margin or gross profit we generate. So if I'm buying something for a fiver and selling it for 10 quid, that's five pounds per item. I then take it to cap my

fixed operating costs. If they're a thousand, divide it by five and that gives me 200 items. So breakeven is that position, that point where I nor ever lose money or make money. But it's a good identification number nevertheless. The last one I'm gonna look at, which covers the other arenas are more than non-financial now.

So we've covered cash flows. We've covered the three numbers that make up the working capital cycle, we've covered a breakeven and we've covered gross profit margins. The last four are the more, the non-financial ones. Now one of those, that's a really important thing to measure is what's called a conversion ratio

i.e., based on our leads that we're getting in, based on the inquiries on the website, how many of those do we actually convert to actual business? What we're aiming for is a high percentage. When we look at conversions to actual business, that's a good indicator to look at, and what we're aiming for is to get that conversion ratio as high as possible.

If it's weak, if it's declining, if it's low, it means something's going on that we need to address as to why inquiries aren't ending up as business. The next non financial indicator, which I think is a really important one to look at, is what's called customer lifetime value. That looks at the value our customers generate

or the time we acquire them as customers to the time they leave us and leave us they will do at some point in the future. Look at the overall value of the turnover we generate with that customer. Look at the level of profit that translates into, and that gives you a customer lifetime value. What we're looking at is to maintain that at a good, healthy level.

If it's declining, if it's going a bit wobbly, then we know something is not quite there. It could indicate losing customers at a fast rate than we would desire. The ninth one, nearly at the end of our list of 10 is what's called a throughput value. Now, throughput is a very posh sounding word, but it tells us from the moment that we are commissioned to do a piece of work,

the moment we're engaged by a client, a customer, to sell things, deliver services to them, how long does it take us from that moment to actually deliver that final product to deliver the service? The shorter the timeframe, the time gap between the start and the end, means we can invoice at a much faster rate.

We can generate more work over a period of a year. It means there's good service standards as well, and that's gonna be a positive thing. So look at that throughput number, the time gap between the start of the assignment when the contract is first signed off and the moment that we actually deliver. Now, number 10 in our list, is to look at aspects of quality.

And our good quality measure to look at is in terms of anecdotally the number of complaints, the feedback that we're getting. And if you're not getting complaints, by the way, it doesn't mean everything is rosy. It could be you're not actually asking customers what they honestly think. You're not getting any feedback, you're not actually doing any research into what their problems are with you,

if any. And it could be their floating with their feet, which we don't want. So monitor, keep an eye on what's going on with your customer base, talk to them, engage with them, and any issues that you want to encourage them to feedback to you are not actually discouraged. Feedback and comments. So folks, that's 10 handy ones to share with you that will serve you well.

If you feel there are any that I've missed that you would add to the mix, I'd love to hear from you. In the meantime, I'd love it if you subscribe, if you feel there are people who could benefit from this podcast. I'd love it if you could share it with them. Until next week, folks, happy KPI. We hope you enjoyed this episode and appreciate you taking the time to listen to the show.

We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.