With the new year underway, it is time for lenders and their borrowers to think about ways to quickly measure performance and identify issues and opportunities. 2025 will be a challenging year with ongoing impacts from inflation, interest rates, changing consumer demands, commercial and residential real estate challenges, labor rates, and possible tariffs. There will be issues, and there will also be opportunities.
Monthly financial statements, delivered timely, tend to be considered the most frequent measure of performance business owners and managers have available to them for decision making. In some instances, a company uses a weekly cash flow as a cash management tool, but the cash flow budget to actual performance may not be used as a business performance indicator. As a firm believer in weekly cash management tools, the use of a weekly cash flow definitely provides early insight into performance challenges, which may manifest themselves in weekly cash flow shortages. But a cash flow tool is not successful if it does not measure budget to actual performance.
There is a way to measure performance in real time and gain earlier indications of problems than even a weekly cash flow will provide. That tool is the use of Key Performance Indicators or KPIs. KPIs are unique to each company and measure that company’s performance to its goals. KPIs may consist of financial measurements, operating measurements, marketing/sales measurements, staffing measurements, and any other activity measurement that drives the company to its 2025 financial performance goals.
KPIs may be daily measurements, rolling into weekly, and monthly measurements. The value of KPIs is the ability to use performance measurements to provide the earliest indication of performance to the 2025 plan.
When walking through a company’s office or operating facilities, some measurement of performance, some KPIs, should be immediately visible. Companies may use computer screens, white boards, or any other visible technique that gives employees and managers immediate views into performance. For example, a manufacturer may display the number of units produced or the number of labor hours being expended. A dairy farmer may display the number of cows milked and the milk production per cow. A distributor may show the number of orders to be fulfilled that day and progress to that objective. A sales team may track the number of inbound and outbound calls, and successful order placement.
With payroll and benefits being one of the largest components of operating expenses, tracking employees, FTEs, number of hours worked, number of overtime hours, or other labor related measurement should be part of any KPI development.
Activity levels also need to play a dominant role in KPI development. For example, the number of units produced, sold, delivered, etc. should be tracked. Irrespective of the type of business, there are activity levels unique to that company that could be tracked.
Financial KPIs should also be tracked. For example, the level of accounts receivable at various aging points is an indicator of future cash receipt issues or opportunities. Cash balances may be tracked. Line of credit balances could be tracked. Working capital focused financial KPIs are able to identify potential cash flow problems while also indicating their source – paying payables too quickly, collecting accounts receivable too slowly, relying on debt rather than capital. Financial KPIs may also be one of the first indicators of higher levels of sales that may require additional working capital.
If the company did not create its 2025 forecast based on a build up from KPIs, then this is the time to reverse engineer the KPIs needed to support the 2025 performance objectives.
Once the KPIs are established, the entire company needs to understand how KPIs drive performance and how each employee can see their contribution to the overall performance objectives. For some employees, this could be displays in their work area, for others it could be a daily activity report delivered via email. Managers need to see roll ups of the base KPIs on a daily or weekly basis to enable real time performance changes to improve the ability to reach the 2025 objectives.
The use of KPIs can help a company identify problems before those problems create issues with cash flow or with budget to actual performance reporting.
KPIs need to be developed to measure activity requirements for operations, finance, and sales/marketing. Those three areas of business management are the three legs of a stool that supports a company’s financial and operating success. Having KPIs in each of those key areas will help all members of the management team work together to solve performance problems before they become insurmountable. These KPIs will help identify changes in the business that require a response from one of the three areas – operations, finance and sales/marketing. Business leaders who use KPIs to measure performance also have a higher chance to develop a cohesive management team that will be able to work together to solve problems.
For business managers, KPIs improve the opportunity for success by providing real time tracking of activity levels necessary to support the 2025 forecast. For lenders, a company’s use of KPIs can provide added assurance that early problem solving will be in place and create a higher likelihood of success.
If you would like to discuss how to bring KPIs into your 2025 plans, or how to develop recovery plans if performance falters early, please reach out to Focus Management Group via email or cell. Our contact information is below, and we welcome discussions.
KPIs are an excellent form of immediate tracking, that results in early intervention if problems or adjustments if successes.
Juanita Schwartzkopf
Sr Managing Director, email j.schwartzkopf@focusmg.com | cell (520) 203.2926
Joe Karel
Managing Director, email j.karel@focusmg.com | cell (312) 307.1541
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