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A key part of using management accounts is knowing how to judge your data.
This is the stage when you take a look deeper into your figures and work out if you are hitting your targets.
A great way of keeping track of your performance is by using KPIs.
But what are they? And which ones should you include in your management accounts?
Let’s take a look.
What Are KPIs?
KPI stands for key performance indicator.
These are metrics that are used to evaluate and measure the performance of your business.
When it comes to finances, management accounts are a great way of assessing your success over a period of time, and by adding some KPIs into the mix, you can make sure you get a clear overview of just how your business is doing.
KPIs come in all shapes and sizes, and don’t have to be financial, but could focus on customer or employee satisfaction instead, for example.
When it comes to management accounts and you are dealing with documents such as cashflow and revenue statements, then the financial KPIs fit the figures much better.
So, which ones should you use?
Well, here are seven examples of how you can track your financial success.
Let’s take a look.
7 Key Management Account KPIs
1. Revenue Growth Rate
Revenue growth rate measures the change in a company’s revenue over a specific period, usually a quarter or a year.
The calculation looks like this:
[(Revenue in current period – revenue in previous period)/revenue in previous period] x 100
So, for example, if a company made £100 in revenue in the last period, and £120 in this period, it would be:
[(120- 100)/100] x100 = 20%
This is a great way of working out if your revenue is increasing or decreasing and gives a clear indication of the direction your business is heading.
2. Gross Profit Margin
This KPI takes into account how much a business spends, and how much revenue it is bringing in, and evaluates if it is performing well.
A higher gross profit margin is a positive thing, as this shows you are making more revenue than you are spending on production. If you have a low gross profit margin, your revenue from each product or service sold will be small, and it is an indicator that it may be time to focus on reducing costs or increasing prices.
The formula for this is:
(revenue – cost of goods sold) / revenue x 100%
So if a company made £100 in revenue, but spent £60 on goods, it will have a gross profit margin of £40, which will be 40% gross profit margin.
3. Operating Expense Ratio
This simple KPI is handy for working out how much of your revenue is being used to cover operating expenses.
The formula looks like this:
Operating expenses / revenue x 100%
So if a company made £100, but spent £50 in operating expenses, the operating expense ratio would be 50%.
This is an important metric as if your percentage is very high, then it shows that a large amount of the money you make is being spent again on operating costs, and won’t be turning into profit.
An efficient company will have a low operating expense ratio, and this is often seen as a sign that a company is well managed, so if yours is looking slightly higher than you would like, try and look for ways to bring it down.
4. Return on Investment
This is a well known KPI that measures the profitability of an investment by comparing the amount of return to the initial cost.
So, the formula looks like this:
(gain from investment – cost of investment) / cost of investment x 100%
So, if you invested £100 into something, which then led to a return of £120, your gain is £20. Divide this by the cost of investment again(£100) and multiply by 100 to gain your percentage score, which in this case would be 20%.
ROI is usually expressed as a percentage and is used to evaluate the performance of investments over time.
It is worth noting here that there is no time scale on ROI, so it could be counted over a month or a decade.
If you are regularly investing in different opportunities, then running ROIs regularly may help you decide which are worth keeping on, and which are worth backing away from.
5. Customer Acquisition Cost
This is an important metric, especially for businesses who focus more on attracting clients and offering a service.
Customer acquisition cost, in a nutshell, is how much it costs to acquire a new customer.
So, the formula looks like this:
Total marketing expenses / number of new customers acquired
So, if you spent £100 on marketing and customer out reach, and picked up 10 new customers, then your customer acquisition cost would be £10
The important thing to consider here is how much does a customer bring into the company. If for the above example, your customer only brings in £5, then you are spending more acquiring them then you are actually getting in return.
If the customer spends £1000, you are making a great investment.
This is an important KPI to keep track of and trying to keep this number as low as possible will benefit your business in the long run.
6. Average Order Value
We mentioned above why customer acquisition cost is so important, and this brings us nicely onto our next KPI.
Average order value works out how much each customer is spending on average.
As mentioned above, this is handy to be able to compare to your acquisition cost and see if you are making a profit or a loss.
To work out your average order value, you must:
Total revenue generate / number of orders or transaction
So, if you made £100 from 5 orders, your average order value is £20.
This is another KPI that provides good insight when run alongside other metrics, but can also help on its own by providing a good indication of how much each customer is spending. If they’re spending a lot, it shows your products are attracting a higher price. If the average order value is low, maybe customers are choosing your lower cost options, and this may need to be addressed.
7. Budget vs. Reality Performance
Now this is a bit of a different one.
One of the main benefits of management accounts is that you can forecast for the future and then assess whether you are hitting your goals over a period of time.
So, how can you work this out?
Well, there is no set formula for this one, as it is up to you.
Do you want to hit a certain ROI? Or maybe customer acquisition cost is more important to you?
Perhaps you want to hit a certain percentage when it comes to gross profit margin?
The KPI here is working out how close to your target you are, so if you would like a 20% return on investment, and you are only hitting figures of 10%, you can see you are 10% down on your target, and therefore are underachieving.
Work out what KPIs are most important for your business, set a target, and then compare these when the period is over to see how you are performing in the KPIs that matter most to you.
Management Accounts with Blue Rocket Accounting
If you want some advice on setting up and assessing your business’ management accounts, then why not get in touch with Blue Rocket Accounting today.
Our management accounts team would love to hear more about your business, your key targets, and the areas in which you would like to improve.
