Understanding KPI and benchmarking is essential for businesses looking to improve performance and efficiency. While KPIs track internal progress, benchmarking helps compare performance against industry standards. Benchmarks and KPIs are both methods of determining a business’s financial performance, and they can help gauge a company’s financial and operational performance while identifying future strategic initiatives. However, many people ask whether benchmarks and KPIs are the same thing, and the answer is no. Despite some similarities, KPIs measure internal success, while benchmarks measure a company’s success in relation to its competitors.
Fully Accountable has a complete team of experienced financial professionals who identify benchmarks and KPIs and work to implement them into your company’s strategy and infrastructure. Whether you simply need automation or something more hands-on, such as a fractional CFO, Fully Accountable ensures your bookkeeping and accounting procedures are as comprehensive as possible.
What Are Financial KPIs?
Financial KPIs are metrics that examine the financial performance of your business. Financial KPIs are split into five categories: profitability, liquidity, efficiency, valuation, and leverage.
What KPIs Should My Business Track
Finance benchmarking metrics such as net profit margin, return on assets, and cash flow ratio are crucial for evaluating financial health and efficiency. The following KPIs are some of the most important financial metrics to measure your business’s success.
Operating Cash Flow (OCF)
Operating cash flow displays the total amount of money generated through your company’s business operations. From a KPI standpoint, OCF can reveal whether your business needs cash flow to grow or whether it needs external financing to keep up with the total expenses.
Current Ratio
The Current Ratio KPI shows whether your business can fulfill all of its financial obligations for the year. It measures all of your organization’s current assets against all of your liabilities. For example, this would measure your account receivables against your account payables.
Current Ratios of less than one indicate your company can not fulfill all of its financial obligations. If your company has a Current Ratio of less than one, it indicates you need to implement additional cash flow.
However, businesses in growth mode or those aggressively investing commonly experience Current Ratios of less than one. When the Current Ratio stays beneath one for an extended period, the company needs to take immediate action.
Current Ratios between 1.5 and 3 are considered healthy. Anything over three can be a signal that a company has a lot of assets and cash to invest, but they aren’t investing anything in their innovation and growth.
Quick Ratio/Acid Test
The acid test indicates whether a business has enough short-term support to cover its near-future liabilities. It gives a more accurate overview of your company’s financial health because it ignores liquid assets such as inventories.
You can use the following equation to determine your Quick Ratio:
Quick Ratio = Cash + Accounts receivable + Short-Term Investments divided by Current Liabilities
Burn Rate
The Burn Rate reflects weekly, monthly, quarterly, or annual spending rates. It is best suited for smaller companies that don’t aggressively invest and don’t need extensive financial analysis tools. The Burn Rate offers a more in-depth look at your company’s long-term financial sustainability than your Net Profit Margin and Revenue.
Net Profit Margin
Net Profit Margin shows a company’s profit compared to its revenue. Calculating this metric as a percentage indicates how much profit a company makes per dollar earned. This is one of the most important financial KPIs as it shows the company’s overall profitability and whether it can grow in the long term.
Gross Profit Margin
The Gross Profit Margin measures the proportion of money left over from revenue after accounting for the cost of goods sold. It is an excellent indicator of your company’s financial health, and it displays whether a company can pay its operating expenses while having funds left over.
Unless companies make significant changes to their production methods or they change their price model, they should have a relatively stable Gross Profit Margin KPI.
Current Accounts Receivable
The Current Accounts Receivable measures the amount of money owed to your company from your debtors. It displays the estimated upcoming income and calculates how long it takes your debtors to pay their debts.
Current Accounts Payable
The opposite of Current Accounts Receivables is Current Accounts Payable. This metric indicates how long it takes your company to pay its debts.
Accounts Payable Turnover
The Accounts Payable Turnover represents the rate organizations pay their average payable amount to suppliers, banks, and other creditors.
You can calculate the Accounts Payable turnover by dividing your value of purchases by the remaining Accounts Payable amount. If your turnover ratio falls compared to other periods, you might be having trouble paying your debt. If the rate increases month over month, you are paying your debts faster than before.
Inventory Turnover
The Inventory Turnover KPI shows how a company can efficiently sell and replace its inventory during a given period of time. Essentially, this KPI reflects the company’s ability to generate fast sales and restock.
You can calculate this metric using one of two methods.
Inventory Turnover = Sales/Inventory
Inventory Turnover = Cost of Goods/Average Inventory
Sales Growth
Sales growth is a simple KPI that represents the total sales generated in a given period. It shows the percentage of the current sales period compared to the previous one. It can effectively communicate a growth or decrease in total sales.
What Does Benchmark Mean in Business?
Benchmarks describe the process you use to compare your company’s financial performance against other companies or competitors. Where KPIs help you gather data about your internal performance, benchmarks help you compare that performance on a larger scale. Benchmarking and performance measurement go hand in hand, allowing businesses to set realistic goals based on industry best practices.
Benchmarks are often used to compare:
- Customer satisfaction
- Costs
- Product and service quality
- The time it takes for you to complete projects.
When you use benchmarks, you compare yourself with others in your organization to improve your internal processes and technologies. Benchmarking is the most effective way to identify various opportunities for improvement within your organization so you can compete with others in your industry. Benchmarking helps you uncover opportunities for improvement throughout your organization so you can reduce costs and increase efficiency and customer satisfaction.
If you need consulting regarding how to improve your benchmarks, an outsourced CFO can help you define and utilize benchmarks.
KPI Benchmarking: Comparing Businesses With Performance Data
KPIs and benchmarks are separate ways to measure a company’s success, yet they can also be combined. KPI benchmarking is the practice of comparing your business’s performance against a competitor’s performance by using hard data. Rather than comparing financials, a benchmark KPI compares more granular aspects of the business, such as conversion rates, customer churn rates, customer service satisfaction average, employee satisfaction, and other aspects of the business that go beyond revenue.
These are just some KPI benchmarking examples, and they may not apply to your business. Common KPI benchmark examples include customer retention rates, employee productivity, and financial ratios like net profit margin and revenue per employee. An eCommerce KPI benchmark may not work for a brick-and-mortar retail business. However, finding the right KPI benchmarks for your business can be incredibly beneficial, helping you to shore up weak spots and reinforce strengths.
Want to know more about Fully Accountable’s KPI reporting? Watch Our Demo to learn more!
What Are the Differences Between Benchmarking and KPIs?
Benchmark KPIs are the key performance indicators that determine your business’s success. While KPIs indicate a broader term, benchmark KPIs are specific and give your company goals and metrics to compare your overall progress and performance.
However, identifying these KPIs is a time-consuming, intensive task that requires both automation and data analysis. That’s why we here at Fully Accountable believe you deserve financial professionals who can help guide you through the identification and analysis of these critical indicators.
Contact us today at Fully Accountable to learn more about what benchmark KPIs can do for your organization.
Frequently Asked Questions
KPI benchmarks provide insights into financial performance by comparing key metrics against industry standards, helping businesses identify strengths and areas for improvement.
Small businesses often track gross profit margin, accounts payable turnover, and operating cash flow to measure financial stability and growth.
By analyzing competitors’ benchmarks, businesses can refine strategies, reduce costs, and optimize resource allocation to achieve better outcomes.
Yes, businesses can benchmark non-financial KPIs such as customer satisfaction, employee engagement, and operational efficiency.
