By Nick Levine, Advisory Lead at Propel by Deloitte
Measuring KPIs can be beneficial for high-growth businesses in order to allow them to see whether they are hitting overall company targets, alongside providing investors and senior team members with up-to-date management information. These data points can help set the strategic direction of businesses, as well as enabling them to analyse the overall profitability of different business departments.
How can KPIs inform financial models?
A forward-looking financial model is essential to high-growth businesses. This can be used to underpin fundraises, as well as allowing companies to forecast how they are going to perform ahead of time. A robust financial model is underpinned as KPIs, which act as data points to help build up accurate and complete financial models. Whilst common expenses, such as operating expenses, wages and rent are easy to forecast – costs related to driving demand, revenues and cost of sales are harder to predict.
Being able to understand the unit economics of your business will provide a solid framework to set and measure KPIs which can inform your financial model. Unit economics are the direct revenues and costs associated with a particular business model expressed on a per-unit basis. For example, they may include customer acquisition costs and gross profit margin per products.
Which KPIs are right for my business?
Choosing the KPIs most relevant to your business will vary according to whether you sell physical goods or services.
If you are selling goods you will need to get a handle on your gross profit margin. For example, if you run a restaurant business you will need to measure the gross profitability of individual dishes in order to make sure that the same quantity of ingredients is included across your range. If your target gross profit percentage KPI for a dish is less than you forecast this could mean that your suppliers are becoming more expensive or that you will need to enforce stricter portion control in the kitchen.
Software service-based businesses KPIs will focus on scale. These companies need to ensure that their churn rate (i.e. percentage/number of customers cancelling) is consistent and fed into their financial model. Letting this KPI lapse will undermine the ability to accurately forecast future revenues. Additionally, this could have knock-on implications for customer acquisition costs, which may need to be reduced accordingly.
All high-growth businesses, irrespective of sector or focus, will need to focus on their cash burn rate. They will need to be in a strong position to go out to market and raise more funds with enough money in the bank to ensure that they can retain a strong negotiating position.
How can I measure and assess my KPIs on a monthly basis?
The simplest way to do this is in an Excel spreadsheet. Take exports from your actual financial data and manipulate this manually to crunch down into your chosen KPIs. If the month-on-month comparisons show strong variance this will create the need to understand what has happened and whether this could impact your forecast.
In this scenario, you may need to liaise with different departments. For example, your sales team should take ownership of revenue related figures and the partnerships/marketing team should be responsible for customer acquisition costs.
Can I automate measurement of my KPIs?
Using third-party software tools can take out the grunt work of manually manipulating monthly KPIs yourself, as well as reducing the chance of human error. Forecasting and reporting dashboards seamlessly connect to cloud-accounting software and blend both financial and non-financial (i.e. number of sales, website visitors) information to present this as timely management information.
Having a real-time view of these KPIs on a dashboard, can inform decision making and can act as data points to review on daily basis as opposed to just being a month-end process.
Propel by Deloitte delivers bespoke data analytics to help you track how your business is performing today, and a whole range of business planning support to help you forecast for tomorrow. Contact us to discuss how we can support you.