SME Blog

KPI's - Non financial

Ask an accountant about KPI's (key performance indicators) and invariably you will get a list of financial KPI's such as average debtor days and gross profit margin.  These are all well and good, but it is really only half the story.

As a small business grows to a mid-sized one the business owner starts to become more detached from the everyday detail.  Business tasks will need to be delegated and this is where non financial KPI's are particularly useful.

Non financial KPI's on business processes allow managers to measure how well their business is running.  An example KPI is the Perfect Sales Order. This is ability to deliver to the customers' requirements without any issues.  A low result could be due to delivering late, the wrong quantity or damaged goods.  In a mid-sized business it is expected that the managers will be aware there is a problem.  However, by representing the problem as a metric that problem can be measured and goals set to improve performance.

Nadim Razvi from SAP got in touch with me and pointed me to their KPI's wiki.  Well worth a look as it contains a good selection of non financial KPI's.

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KPI's Part 3

Now we all know what KPI's are ( if not see Part 1 & Part 2 ), let us actually use one. A good place to start is to see how we are performing on credit control. 

If on average an SME takes 60 days to pay it's bills and a large company 80 days ( see Getting paid ), then are we getting paid quicker or slower than average?

The way to find out is by using the average collection period KPI as follows:

Average Collection Days =

Average trade debtors (exc VAT sales tax) x 365, divided by annual sales

For example, if our average trade debtors (exc VAT) are 100,000 and our annual sales 1,000,000 then our average collection period is 36.5 days.  A good result and one most SME's would be more than satisfied with. 

It could be that our debtors were 200,000 instead of 100,000 then our average collection period would be 73 days.  In this case we could look at improving credit control to get paid quicker and help with cashflow.

By monitoring the KPI we can spot potential trends in advance.  For example, when the average collection days lengthen it could be the result of economic factors, such as a recession.  It could be that a particular industry sector is hardening with the result cashflow and margins are tighter for all companies involved. 

Monitoring average collection is also a great way of monitor credit control performance; if you stop chasing the debts for a month then you can expect the average collection days to increase.  For start-ups it is all about cashflow and not paper profits and average collection days helps put credit control into focus rather than it being a blur.

Background information & detail

Annual sales

Ideally, this should be credit sales only e.g strip out any cash sales. The sales figure needs to be annual so ensure that you take a 12 month peiod.

Average trade debtors

It is usually adequate and easier to take the period end figure.  However, if there are very large seasonal variations in the year it is better to take an average figure. The true average is the average of 12 monthly debtors figures. 

To compare directly with published credit control statistics ( see Getting paid ), VAT sales tax needs to be excluded from trade debtors figure.  However, to monitor changing performance for the business it's adequate and easier to use trade debtors including VAT sales tax.

Philip Woodgate

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KPI's Part 2

What are KPI’s. Let’s forget SME’s for a moment and concentrate on sport.  Tennis has them (number of Aces), football has them (shots on target), motor sport has them (fastest lap) as does athletics (distance jumped).  They all provide additional information to help understand the sport.  If you are a football commentator you may be interested in shots on target, shots off target, number of corners and percentage possession.  If, like me, you know nothing about football you may only be interested in goals scored (although percentage possession fascinates me for some reason.)  If you are the club owner then you will be interested in cups won.

These are all KPI’s.  Quite wisely in sport they are not called KPI’s.  They lose the jargon in order not to put you off.

We can draw several conclusions from the above.

1) Not all KPI’s are based on financial information.
2) Different sports need different KPI’s (it’s the same for companies).
3) Different people require different KPI’s.  For example a club owner does not need the same level of detail as a club manager.
4) Don’t let jargon put you off something that is generally useful.

KPI’s can be used to monitor, benchmark, improve performance and ultimately help your business achieve it’s goals.  More later.

Philip Woodgate

KPI's Part 1

I'm often surprised that more SME's don't use KPI's (key performance indicators) to their benefit. Certainly in larger companies they are used widely.  I think the reason for this has to do with resources.  In a large company they have a team of accounting professionals focused on producing the monthly management pack with relevant KPI’s.

Contrast with the SME.  It’s not unusual for the accountant to be head of human resources, car fleet manager, treasury, legal department (sales contracts), insurance and, “oh while you’re at it can you organise the Christmas party”. It’s a challenging role and just producing timely accounts can be difficult, let alone producing KPI’s.  But KPI’s are very useful as I hope to demonstrate over a series of articles in the coming weeks. They can help you see the wood from the trees.

Philip Woodgate