Benchmarking 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. While they have similarities, they measure separate things.
These KPIs can often be automated, but they require thorough analysis to unlock their full potential. Fully Accountable has a complete team of experienced financial professionals who identify benchmark 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.
Whether you need automation to track your company’s financial performance or something more hands-on, such as a fractional CFO, Fully Accountable ensures your bookkeeping and accounting procedures are comprehensive and effective.
What Are KPIs?
KPIs, or key performance indicators, are metrics that offer insight into the underlying aspects determining a business’s success. They uncover any important insights a company needs to include in their directives. Whether a company needs to measure sales growth, net profit, or whether they need to monitor their cash flow, KPIs are the numbers that allow them to do so.
Over time, you can use these metrics to determine long-term strategies and analyze trends. When you look at KPIs across a broad spectrum, you can gain a more accurate picture of your business’s successes and failures while identifying opportunities for improvement.
What Are Benchmarks?
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.
Benchmarks are often used to compare:
- Customer satisfaction
- 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.
What Are the Different Types of Benchmarks?
There are several types of benchmarking. You can perform internal, competitive, functional, or generic benchmarking. Internal benchmarking compares internal processes within your company. For example, you can compare different stores within your organization. Competitive benchmarking refers to benchmarking that looks directly at your competitors so you can improve your internal operations. Functional benchmarking refers to comparing similar practices across different industries or companies. Generic benchmarking refers to identifying work processes that don’t need to be in the same industry or job function to compare.
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
The following KPIs are some of the most important financial metrics to measure your business’s success against.
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.
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 such as account receivables against all of your liabilities such as 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 3 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
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. You can calculate this metric as a percentage and it 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.
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 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 a previous one. It can effectively communicate a growth or decrease in total sales.
How to Define the Right Financial KPIs for Your Business
Determining which KPIs are best for your company varies depending on your industry. What makes sense for one company won’t make sense for another. For example, Burn Rates are more suited towards a smaller company infrastructure that doesn’t aggressively invest or plan on substantial growth.
Measuring and Monitoring KPIs With Financial Management Software
The best way to track KPIs is with digital accounting software. This software allows companies to analyze inventory, sales, receivables, payables, and human resources. Manually conducting these operations takes time and company resources most businesses can’t afford.
The software automates these reports and calculations and organizes the information in neat clipboards, giving power to the company to easily access and analyze these metrics.
How Are Benchmarks and KPIs Related?
The primary relationship between benchmarks and KPIs is that KPIs need benchmarking to establish the appropriate targets for KPIs and performance thresholds. A good way to conceptualize the connection between benchmarks and KPIs is considering that benchmarking helps your company set the right target for your KPIs.
Benchmarking can help build plans and strategies that cause continuous improvement within your organization. The most successful organizations use benchmarking and KPIs to look outside of their organization for inspiration on how to internally improve their organization.
Conclusion- 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.