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KPIs Selection - Less is more
Published almost 2 years ago • 3 min read
Hey Everybody,
This is my first edition of Tuesday's Booster. I provide finance stories from the reality that ended with good outcomes to everybody: finance experts (employees), management, and my firm.
My friend Andrew is the owner of an architecture firm. He asked me to help them to set up functional reporting and a KPIs Dashboard.
I was so excited to work with them and know some other nice people who work there.
But, here's what I found in practice.
OH Noooooo #1
I forgot that their finance knowledge is horrible and I need to teach them some basic stuff again. I have been doing this for 17 years!! Engineers and finance, what the hell. Some managers don't even know how P&L looks like.
OH Noooooo #2
External accounting agency, use chart of accounts from the year of 1856!! No cost centers, no service lines.
OH Noooooo 3#
They are control freaks. They use about 30-40 metrics to measure the performance. I said, myself: man you need to delete all of them and implement the new KPIs!
OH Noooooo #4
They have a budget that mixes opex and capex on 20 sheets!!!
I think it would be optimal for such a company to track 8-9 KPIs. After all, as the owner of a service business, I also have that number of KPIs. It's crucial. Peter Drucker said: You Can't Manage What You Don't Measure.
But they don't even know what KPIs are. How to calculate them. How to track them. How to compare them over time. How to compare them with the competition.
So, my decision was: Let's start by introducing them to 5 KPIs. In their situation, if I give them more, there won't be any effect. In most cases, less is more.
Meanwhile, my team sorted out the accounting, introduced a functional Chart of Accounts, and functional P&L, even created a Dashboard with 5 KPIs, adjusted their budget to the new format, and prepared the manual on how to do monthly reporting internally.
After the first meeting, nothing was clear to them.
It wasn't until after 3 meetings and the creation of a manual for monthly reporting and the dashboard that we could take a breath.
How did I choose the KPIs?
It might sound crazy, but sales are the key KPI in this case. We had to track it, primarily because of project uncertainties, project dynamics, work in progress, and many other factors. By tracking sales, a lot can be learned in an architectural firm.
If there are variations, I taught them to look at:
Whether the change in work in progress affects total revenue.
Whether sales are secure, but project dynamics are delayed, so it will be invoiced in the following month.
Whether projects are running out.
In which direction the company is growing.
Furthermore, we stick to the basics. Net profit. I prioritized it over cash flow, even though cash flow is what we can take home. I noticed that they didn't have working capital or significant investments, so net profit is a great approximation of cash flow.
The third one was gross profit, to see how much profit is left after subtracting direct costs and how it fluctuates. Other costs in the service business are more manageable. So the key focus should be on the direct costs and gross profit, right?
In that regard, we also have the fourth and fifth KPIs, which are gross profit margin and net profit margin.
I wanted to increase the operational efficiency of my friend's firm and create less headache for him. I prefer highly profitable service businesses. If a 20% increase in profit comes from doubling the operations (read sales) f**** such a model.
Sounds simple, right?
But these 5 KPIs and their tracking lead to over 100 questions. Those answers have brought peaceful sleep to Andrew and his company.
But the control freak is still there, it seems like it's innate.
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My emails unlock the secrets of corporate finance modeling: bite-sized tips, real-world examples, and Excel hacks to build models that impress level up your finance game from newbie to pro!
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