By Kristen Berdar
Webster’s Dictionary defines metrics as standards of measurement and, while these are fundamentally quantitative in nature, metrics can also be viewed as pieces and parts of a story. In this article, we will discuss why metrics matter and how they play an important role in the story of a business.
Insight to drive key decisions
Any type of metric that helps businesses get to or through a decision-making point would be important and valuable. Additionally, identifying a turning point to make a stepwise change in a business can be informed by the proper set of metrics. These metric-based decision points can influence long-term matters such as infrastructure requirements or nearer-term matters such as proper levels of sales staffing or inventory restocking.
There are key metrics that not only provide insight as to an organization’s financial “health” but are also required by external organizations to which a business may be reliant such as banks for the establishment or management of lines of credit. In this case, bankers will look at metrics such as cash flows and leverage to make sure that a company can handle its debt burden and be able to sustain itself and move forward.
Metrics presented through dashboards
Metrics can be effectively presented via a “dashboard” which is a tool used to present all important management data in a single place. These dashboards – fueled by key metrics - empower management to make fast and data-driven decisions based on the latest information. At BST’s Virtual Accounting Solutions (VAS), we build dashboards for our clients that help them run their business and may include inventory turnover, debt to equity ratios along with trending analysis as well as statistical metrics such as the number of items sold.
Metrics can assess financial status at any point for matters that relate to balance sheet items within a financial statement. These metrics focus on point-in-time measures including liquidity and leverage ratios. Banks typically like to look at debt ratios throughout the year.
Other metrics measure results over a period of time and take into account cumulative effects. These metrics tend to derive from the profit and loss statement and include categories such as sales, net return on sales, cost of goods sold, gross profit and EBITA. Other examples may include items such as breakeven analysis - how much sales does a business need to cover monthly costs?
Frequency of assessing metrics
Some metrics can/should be reviewed frequently (i.e. daily) for areas such as cash receipts, inventory levels, or spoilage. Other metrics are better assessed on a monthly or quarterly basis as these will include items that do not fluctuate much on a day to day basis.
Common examples of frequently reviewed metrics include inventory levels and inventory turnover and being able to assess this in one place without having to toggle back and forth between different areas, such as a POS system is important. Additionally, accounts receivable, collections, sales, and cash cycles should be tracked by having that information at manager’s fingertips. This can help to project what might be occurring in the next 30 days or 60 days or 90 days.
Benefits to management by metrics
VAS clients invariably point to time savings as a benefit to having data presented in an easy to use manner. Dashboards can be structed via formulae and the resulting efficiency reduces the need to pull data from disparate and non-connected sources. This saves many hours because previously the preparation of key metrics required compilation and calculations. With dashboard driven metrics, compilation and calculation occur automatically. Managers can log-in in the morning, perform a daily check-in, and see exactly what is going on as often as they like.
Clients also appreciate role-based metrics and dashboards. An example may be a business run by partners where one is responsible for sales and marketing and one is responsible for operations; each would be looking at vastly different metrics. So, VAS can provide each owner with the information that they need to be able to do their part in the business so that they can then come together and grow the business in a very collaborative manner.
While metrics such as current assets, current ratios, and working capital are crucial, there are also business-specific metrics that can useful and helpful. By way of example, a home improvement focused business may analyze the number of gallons of paint sold in a day or the number of employees required during seasonal periods. Rather than poring through disparate places for info, a dashboard can readily provide that insight. Plus, these key metrics can be compared to industry peers to measure and monitor performance.
Metrics and dashboard facilitate decision making
One of the tremendous features of contemporary accounting systems and dashboards is the ability to visually present a businesses’ story. The days of poring through multi-tabbed spreadsheets or, even worse, reams of paper have now been replaced with information presented in a very visually engaging and easy to assess manner. Whether its though color coding, directional pointers or other warning signs, metrics presented in this way provide managers with visual cues as to where they need to direct their focus.
Flexibility is also built into these dashboards as financial reports can easily be converted into graphs, pie charts, bar graphs, etc. Plus, drill down capability is just a click away if there are questions or additional data is needed.
Using metrics expertly and properly
Structing and using metric driven dashboards should be led by an experienced financial professional as these professionals can assist in interpreting what information means and how to strategically assess it. Strategic discussions regarding infrastructure investments, budgeting, and shortening the cash cycle can be infused with metrics. And finally, financial professionals can bring perspective and experience to situations where, for example, a dashboard may indicate a warning and a professional will know where to look to mitigate and address an area of concern.
Metrics do matter and using them effectively, effectively, and regularly can help to shape the success story of a business.