The Single Most Important KPI for Your Business
“What is the most important KPI I should be looking at in my business?” is a question I am asked constantly. “Well, that really depends on your industry” is the lame, ambiguous, non-committal answer I usually give. It’s not that I’m not familiar with lots of different metrics, ratios, and ways of analyzing companies. It’s just that I’ve never run across a one-size-fits-all metric . . . perhaps until now!
Recently one of my clients sent me a copy of a Harvard Business Review article titled How Fast Can Your Company Afford to Grow? (which I highly recommend reading). The authors lay out a simple method to calculate a company’s “self-financeable growth (SFG) rate”. This metric is fantastic! With just a few inputs, a business can know how fast they can grow with the resources they have. Furthermore, they can understand what happens to this rate when they increase the speed of their cash flow (through collecting A/R faster, turning inventory over faster, or increasing A/P), reduce costs, or raise prices.
To make the calculation of the SFG rate simple to understand, here is a link to a Google Sheet named “Your Most Important KPI” that I prepared. You’ll find in the first tab a demonstration of the metric as applied to the company in the HBR article. The second tab allows you to enter your own prior year data. Feel free to download it or play with it live. The yellow cells highlight places to input your company data (sales, COGS, operating expenses, and ending A/R, Inventory & A/P) and presto. You now know how fast you could be growing (if you are trying to do it internally), and what happens if you make changes to the variables mentioned above. If you want to get crazy with this and add in layers of sophistication, refer to the latter part of the HBR article.
Everyone knows that “Cash is King”. Businesses that ignore this principle are doomed to an ongoing struggle or death. With the SFG rate you now have in your hands the single most important KPI for your business that gives you the tools to keep the “King” on his throne.
Casey Foote, a partner at Advanced CFO Solutions with over fifteen years of management experience as a controller and CFO and has also owned and managed construction and real-estate development businesses. He earned his MBA degree from the University of Pennsylvania’s Wharton School of Business with an emphasis in finance and his Master of Accountancy and BS in Accountancy degrees from BYU’s Marriott School of Management. His passion and unique talent for modeling, analytics and forecasting, make him a valuable resource. Very few have his aptitude for assisting businesses streamline accounting systems and finding innovative solutions for the complexities of their business environment.