Use Ratios to Track your KPIs

I wanted to expand on a post from a couple weeks ago (Don’t Delude Yourself With Your Own Data). In that post, I wrote about using ratios to present your data rather than the raw data itself. This can be very powerful and, when used correctly, can really offer a lot more insight into what is actually happening. The ratios we typically use are the 3/12 and the 12/12 rate of change ratios. The 3/12 rate of change shows the moving ratio of the last 3 months of a metric compared to the same 3 months the previous year (a 3/3 rate of change would be the last 3 months compared to the previous 3 months). The 12/12 rate of change would compare the running total of the last 12 months compared to the previous 12 months.One nice thing about these ratios is that they are a very easy method of visually gettting data quickly. Anything that is above the 0 line is growing, anything that is below the 0 line is receding. These can be used on nearly any metric that your company tracks.

Below is a graphic taken directly from the Quickbooks data of an actual small business.

Ignore the high points on the left of the ROC (Rates of Change) graph. It is an anomaly in creating a graph like this.

Let’s first look at the Actual Figures graph. As you can see, there isn’t a lot of good information here. It shows revenue by month from January 07 thru January 10. Lot’s of ups and downs but the beginning numbers (on the left half of the graph) look a lot like the ending numbers (the right half of the graph). Maybe a little lower more recently, but something that could pretty easily be blamed on a poor economy and ignored.

But now take a look at the ROC graph. Remember that any thing below zero here is receding. This company has been mainly in decline since very early in 2009. Another thing to consider is that ROC is cumulative so when you see a long term backslide like this it is getting worse and worse. Even though the ROC graph does not have large swings (and this is by design since it is meant to take seasonality and other anomalies out of the equation) it is very easy to see when to begin being concerned. A person that was used to seeing this graph would definitely have been thinking about making adjustments in June or July of 09 whereas someone looking strictly at the bottom graph may not have really sensed there was a problem.

Again, revenue is really an easy thing to track and it is maybe not even the best metric. Most companies should be tracking at least 6 – 10 KPIs (Key Performance Indicators) all the time. They will be different metrics for different types of companies (for example, a service/labor based company would not track ROCE (Return on Capital Employed) but any company with lots of assets certainly would). By the way, for companies that it applies to, ROCE is a great metric to track using these kinds of ratios.

When any one of these ratio indicators moves negative it may not be cause for concern. When two move negative, it’s time to really start paying attention and when you see 4 or more of your KPI ratios dipping significantly it is time to begin making adjustments in your business.

For further reading on this subject, a great source (and the source of some of the information from this blog) is the book Make Your Move by Alan & Brian Beaulieu.

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