So, what are metrics and key performance indicators, commonly called KPI’s? 

Metrics or KPI’s are numeric parameters that evaluate the performance and productivity of a business. Metrics and Key Performance Indicators are used synonymously but there can be different definitions. If you want to get really technical, any number on a financial statement or via a calculation is a metric. A Key performance indicator or KPI is a metric that usually requires a calculation that reveals something that is much more understandable than the numbers on the financial statements.

Metrics are used because they are much more understandable and useful than numbers on financial statements.

For example: In the first 3 lines below is what accounts receivable is, off the financial statements for a hypothetical company on June 30 2021 compared to accounts receivable in the prior 2 years.

In the last 3 lines below is what accounts payable is, off the financial statements for that same company on June 30 2021 compared to accounts payable in the prior 2 years.

Accounts Receivable:

06/30/2021 $200,000

06/30/2020 $195,000

06/30/2019 $205,000

Accounts Payable:

06/30/2021 $150,000

06/30/2020 $145,000

06/30/2019 $155,000

The numbers by themselves don’t mean much. There is even a pretty consistent trend when comparing the numbers to prior periods. You might think nothing is wrong

But after using a KPI called “Average Days to collect receivables” we find out that our customers are taking an average of 35 days to pay us. Now, one might say, that’s not bad. Our normal terms are 30 days so they’re only averaging 5 days late.

However, when we take our KPI one step further and make a calculation called “Average Days to pay bills”, we find that we are paying our bills every 20 days on average.

Hmmm, Let’s think about this. We’re paying out every 20 days and collecting every 35 days. We’re paying out faster than we are collecting. That smells like a cash flow problem waiting to happen!  

Using KPI’s and metrics, you can sniff out these issues before they come back to bite you.