The Role of KPIs in Decision-Making
- The best cash flow metrics and KPIs tell about your company’s financial well-being and expected growth rate, based on which investors would make decisions
- KPIs help a business to focus on improving operations, provide us with visibility, growth, performance, and sales, and create brand identity, tracking, income, expenses, debt, and liquidity.
- This gives us insights into operational efficiency and financial stability [Source – KPIs: What Are They, And Why Are They Important? (forbes.com)]
TOP 5 KPI’s
- Days sales outstanding – DSO
- Days payable outstanding – DPO
- Accounts receivable turnover – ART
- Accounts Payable Turnover – APT
- Current ratio
- DAYS SALES OUTSTANDING – DSO
Also known as ‘DEBTOR DAY’ measures the average number of days it takes a company to collect payments after the sales are made
IMPORTANCE OF DSO
- It shows the average number of days the company takes to collect payment after the sale
- Lower DSO means quick cash collection, which improves cash flow
- High DSO means that the company faces cashflow problems
- DSO helps the company measure the liquidity
TIPS FOR IMPROVEMENT
- Set achievable and effective DSO targets
- Provide incentives for early payments
- Perform credit evaluations
- Make sure to offer various payments to various
DPO – DAYS PAYMENT OUTSTANDING
The average no of days it takes a company to pay invoices, suppliers, vendors its A.P
IMPORTANCE OF DPO
- High DPO means that the company takes longer to pay its bills, it also means companies are at risk of losing their creditors
- Low DPO indicates that the company is paying bills quickly it may also indicate that the company is not fully utilizing its offer period offered by the creditor
TIPS FOR IMPROVEMENT
- Even though MSMEs tend to have less bargaining probability with suppliers, try to negotiate for longer payment terms
- Regularly forecasting your cashflow, helps you to maintain stability in financial terms
- Opt for automated software so that you can avoid late payments due to manual errors
ACCOUNTS RECEIVABLE TURNOVER – ART
- Also, known as the ‘debt turnover ratio’ number of times a company collects its accounts receivable balance
- High ART suggests that the company is efficient at collecting payment from customers
- Low ART indicates its inefficiency in the collection of debts which may be due to poor management or a risky customer base
IMPORTANCE OF ART
- ART gives you insights into company liquidity and forecasting cash flow
- It also helps to make strategic decisions about cash flow management, collection process, and credit policies
- Allows you to take a sneak peek into the competitors
- Billing optimization helps you to increase your working efficiency by automating the invoice process and reducing invoice errors
TIPS FOR IMPROVEMENT
- Improve your collection process
- Try to build a strong client relationship
- Regularly follow up with clients
- Maintain consistent, timely invoicing
APT – ACCOUNTS PAYABLE TURNOVER
It is the measure of how quickly a company pays off to its suppliers, it is a metric measure of short-term liquidity
- High APT indicates that a company is paying suppliers quickly
- Low APT indicates that a company is taking longer to pay its suppliers
IMPORTANCE OF APT
- A good APT can improve relationships with suppliers, as it tells about your timeline and working efficiency
- For MSMEs increasing sales and not accompanied by APT, not only cashflow is strained, but also strains supplier relationships which are not good in the long term
- APT plays an important role which helping you identify, to eliminate unnecessary expense
TIPS FOR IMPROVEMENT
- Take advantage of discounts offered by vendors for early payments which can improve APT
- Invest in automation software not only increases working efficiency but it enhances relationships with suppliers
- Avoid disputes and maintain healthy relationships with suppliers
CURRENT RATIO / WORKING RATIO CAPITAL
- Current ratio / Liquidity ratio that measures a company’s ability to pay short-term obligations or these dues within one year
- It’s a liquidity ratio that gives you insights into a company’s operational efficiency and short-term financial health
IMPORTANCE OF CURRENT RATIO
- It helps you to understand the ability to cover short-term with current assets
- It gives you insights into the potential liquidity that you may face in the future when your current ratio is less than 1
- Creditors usually consider the current ratio while evaluating a business’s credit status before lending short-term debts
- It indicates how efficiently the MSMEs can optimize the current assets and manage their liabilities
TIPS FOR IMPROVEMENT
- Regular follow ups with the debtor can improve the collections
- Pay off current liabilities as early as possible as the current ratio depends on current assets and current liabilities
- To increase the cash level, sell off the unused fixed assets
- Use sweep account facilities provided by almost every bank to prevent excess cash, as sitting idle in a low rate account
While there are many KPIs, here we focused on the top five that would play a vital role in the growth of MSMEs, without healthy cash flow company’s growth is stagnant. Understand your cash flow and your position in the industry. While standing among the top 5 emerging businesses would be a target for any business, to leverage it opt for automation technology which makes your process faster and better. Understand the wants and needs of the audience in your niche, maintain good relationships with the vendors, and stay regular and consistent with your follow-ups. Days sales outstanding, Days payable outstanding, Accounts receivable turnover, Accounts Payable Turnover, and Current ratio are not just important metrics, but implementing them in daily life and making strategic decisions is necessary.
To start seeing growth you must take action, where we not only guide you but cater solutions based on the problems that are faced by business.
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