Employers and entrepreneurs may differ over a million things. Yet there’s one thing both groups have in common. Guess what, they both want to quantifiably measure their business’s performance against certain goals they’ve identified to achieve over a specified period of time. That’s exactly where something called ‘Key Performance Indicator’ aka KPI comes to life.
Yes, this term can’t get any fancier than this. However, when you’ve implemented what it entails, you’ll definitely agree upon the fact that it deserves to stay in the limelight as much as it does in the world of business. Long story short, you may familiarize yourself with it as something that helps one focus on the right information needed to channel any business over the path of success.
Some Basic KPIs to Never Overlook
So, you must be thinking about how many performance indicators could be justifiably enumerated and put under the bigger heading of ‘Key’. It does seem to go this way since not every type of incoming information can equally benefit businesses. However, there are some indicators that can generally satisfy every initiative’s needs. The Financial Performance Index is one of such basics. Under this umbrella term comes the measure of costs, revenue, profits and other similar financial entities.
Focusing on Revenue and Cost; What are They About?
Every company’s main aim is to generate a certain amount of money. It’s an undeniable objective no owner (whether well-established or recently-stepped-in) can overlook. In technical terms, that’s what is called revenue i.e. the total amount of income raised by any initiative through the sale of services or goods.
And when it comes to understanding ‘cost’ with relevance to the Financial Performance Index, it includes finances involved in making the company run and sustain its place in the marketplace. To be more precise, the pre-opening costs for a startup, as well as post-opening ones, all are considered relevant in this regard. That goes on this way since it is important to keep an eye on such details while planning on deriving profit from overall gross revenue. So as evident as it seems, the reason why businesses fail is that their total revenue is incapable of going hand in hand (at least in the very beginning) with their costs in the first place. Or when it isn’t ample enough to surpass the latter in the longer run.
Analyzing Revenue and Costs; Whys and Hows of Breaking Down
The main aim of chunking larger pieces of information into smaller ones is to reduce the complexity of the information. Instead of looking through information daily it can be summed weekly, or monthly to provide an overview or even a “snapshot” in time. There are things one may not be able to anticipate and take action against while keeping in mind the bigger picture. That is the reason why there exists a need to break down all information pertaining to costs and revenues into smaller subcategories and departments when making the best possible decisions for your business.
As for the hows of doing what has been mentioned above, let’s consider implementing the following practical tips.
Identify Revenue Streams
Jot down the revenue streams your business is generating. There are no generic revenue streams to identify in this regard since each business has a wide range of products or services they offer to generate income. For example, an online initiative may work in partnership with another, and take a commission for advertising and selling their products along with marketing their own products. Likewise, another well-established business may sell directly to the customer with no commission.
Categorize Different Revenues
Revenue streams can also be broken down based upon the time each yields a turnover. Whichever way you plan a breakdown, you can always find out your performance level in each smaller domain, and work out where efforts need to be put more than the others.
Identify Different Costs
Likewise, costs too can be broken down based on general ledger entries. Maintain separate records for each domain your cash flow is going towards. You can then prioritize where money needs to go based on need and urgency. For example, you may be investing money in a software which most companies use, yet your team cannot make use of. Or it may be that you need to invest your finances on the team first for them to learn a particular software’s utility before actually using it. The software may be very handy, yet what is the use of buying something useful when your employees haven’t been trained to use that. So, the learning must come first in this case before the utility.
Categorize Different Costs
Like revenue, costs too can be broken down based on the time you need to cover those. For example, there are costs you may need to pay for once in your lifetime, however, there may be others that are recurring in nature.
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