KPI's for Your Business (and QuickBooks' Company Snapshot)

Running a small business is all about the details.  So much that you can lose sight of the direction your business is taking.  Key Performance Indices (KPI) are a great way for you to see the big picture.  
          Although there are standard KPI's out there for you to use, they can be just about anything, customized to your business.  The trick to making the KPI's significant to you is easy, just follow these steps in making your choice:

1. Use your vision or business plan to focus.  Is customer service your mission?  Choose KPI's that relate to responsiveness, timeliness, and quality of service.
2. Choose 5 or less KPI's to keep an eye on.  Make sure you have one for revenue, one for profitability, and one for cash. 
3. Look at these first, before you look at the rest of your financial statements.  The summary will give you a direction for your review, and you can find answers to your questions.

Quickbooks' Company Snapshot is a ready-made tool that does just that.  Unfortunately, your choices are limited, but there are some good ones in there.  You can program the Snapshot to open on your desktop when you open Quickbooks, which is a good way to get in the habit of checking your company's big picture.

• Open the Company Snapshot (in the bar next to your Home button).  To add content, click the "Add Content" link on the upper left hand side.  You can scroll through the Quickbooks options to select five that work best for you.  
•  I recommend that you use the Income/Expense chart, the A/R Aging report, the Account Balances list, the Vendors to Pay list, and either the Top Customers by Sales or Top Product Sales.  You can arrange these on your desktop by dragging.
• To remove graphs or reports, click the upper right hand "X" and Quickbooks will delete it from your desktop.
• To program Quickbooks to open this report every time you start Quickbooks, with the Company Snapshot open (and no other windows), go to Edit/Preferences/Desktop View and select the Save Current Desktop option.  Click the Save button and you are done!
• There's also a Payments tab at the top of the Snapshot that will take you to another summary screen that is oriented towards receiving customer payments and making vendor payments.  This can be customized similar to the Company page.

There are three other KPI's that I would highly recommend you include at least in your monthly reporting:  Cash Gap, Expenses Per $ Revenue, and Product Margins.

Reading A Cash Flow Statement

          Ah, the Statement of Cash Flows.  Most out-of-the-box accounting software has one available in the report section.  You may also receive one from your bookkeeper, or your accountant.  It can seem a little cryptic (and maybe even pointless).  In fact, the Statement of Cash Flows is one of the most useful reports a small business owner can have.  While the actual statement may not have answers, it can be used to ask some telling questions.
          There are three sections of the Cash Flows:  operations, investing, and financing.  As the names suggest, each one relates to the business activities.  The SEC has a great document outlining the accounting behind all three of these, so I am not going to go into that.  The general rule is positive numbers mean cash increased in that account, and negative numbers indicate cash decreased (or was used).
          In the Operating section of the cash flows, the main points are:  operating income, or your profitability for the period; changes in receivables; changes in inventory; and changes in payables.  An increase in receivables and inventory will be a use of cash (negative number).  An increase in payables will be a source of cash (effectively, you are borrowing from your suppliers).  While reviewing the accounts, ask yourself the following questions:  

• If the operating income is a negative number, is it attributable to an event, or a trend?
• Are receivables increasing  or decreasing as a result of sales activity, or collection activity?
• Are payables increasing as a result of more purchases, increased costs, or slower payment?
• How does the activity in payables relate to receivables?  Here, you may see an increase in receivables and an increase in payables.  Effectively, your customers are borrowing from you, and you are borrowing from your vendors.
• Is the change in inventory due to quantity or price changes?  Is the change related to the change in sales?  Is the change reflected in the change in payables?

The Investing section of the cash flows primarily relates to assets you've purchased.  The main question to ask here is:  

• Are the asset purchases contributing to profitability (operating income)?

The Financing section of the cash flows relates to money borrowed to run the business.  This money can be in the form of loans, credit cards, or even your own cash (equity).  

• Are the funds used for operations or for investing?  

If the funds are being used for operations, you may want to look further into the company's profitability.  The use of cash in this section (a negative number) should be intentional, such as a loan to purchase machinery.  Unintentional financing, such as a creeping credit card balance, are signs of larger issues.

          Reviewing your Statement of Cash Flows and asking the above questions will help you get a handle on trends in your business, and how your cash is working (or not) for you.  After a few times, you will find that this report is just a meaningful as your income statement.