Key Performance Indicators Sample Chapter

7/27/2019 Key Performance Indicators Sample Chapter

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Contents

Itroductio xxv

PART ONE Fiacial perspective 1

1 Nt proft 3Why i thi indicator important?

3

How do I maur it? 4Cot/ort in collcting th data 4Targt tting/bnchmark 4Tip/warning 7Rrnc 7

2 Nt proft margin 9Why i thi indicator important? 9How do I maur it? 10Cot/ort in collcting th data 10Targt tting/bnchmark 10Tip/warning 11Rrnc 11

3 Gro proft margin 13Why i thi indicator important? 13


4 Oprating proft margin 17Why i thi indicator important? 17

How do I maur it? 18Cot/ort in collcting th data 18Targt tting/bnchmark 18


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x CONTeNTs

Tip/warning 19Rrnc 19

5 eBITDA 21

Why i thi indicator important? 21How do I maur it? 22Cot/ort in collcting th data 22Targt tting/bnchmark 22Tip/warning 23Rrnc 24

6 Rvnu growth rat 25


7 Total harholdr rturn (TsR) 29


8 economic valu addd (eVA) 33Why i thi indicator important? 33How do I maur it? 34Cot/ort in collcting th data 35Targt tting/bnchmark 35Tip/warning 37Rrnc 37

9 Rturn on invtmnt (ROI) 39Why i thi indicator important? 39

How do I maur it? 40Cot/ort in collcting th data 41Targt tting/bnchmark 41Tip/warning 42


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xiCONTeNTs

Rrnc 43

10 Rturn on capital mployd (ROCe) 45Why i thi indicator important? 45


11 Rturn on at (ROA) 49Why i thi indicator important? 49


12 Rturn on quity (ROe) 53Why i thi indicator important? 53


13 Dbt-to-quity (D/e) ratio 57Why i thi indicator important? 57How do I maur it?

58

Cot/ort in collcting th data 58Targt tting/bnchmark 59Tip/warning 60Rrnc 60

14 Cah convrion cycl (CCC) 61Why i thi indicator important? 61How do I maur it? 62Cot/ort in collcting th data 63

Targt tting/bnchmark 63Tip/warning 65Rrnc 65


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xii CONTeNTs

15 Working capital ratio 67Why i thi indicator important? 67How do I maur it? 68Cot/ort in collcting th data 69Targt tting/bnchmark 69Tip/warning 70Rrnc 70

16 Oprating xpn ratio (OeR) 71Why i thi indicator important? 71How do I maur it? 72Cot/ort in collcting th data 72


17 CAPeX to al ratio 75Why i thi indicator important? 75How do I maur it? 76Cot/ort in collcting th data 76


18 Pric/arning ratio (P/e ratio) 79Why i thi indicator important? 79How do I maur it? 80Cot/ort in collcting th data 80


PART TWO Customer perspective 83

19 Nt promotr cor (NPs) 85

Why i thi indicator important? 85How do I maur it? 86Cot/ort in collcting th data 87Targt tting/bnchmark 87


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xiiiCONTeNTs


20 Cutomr rtntion rat 91


21 Cutomr atiaction indx 97


22 Cutomr proftability cor 103


23 Cutomr litim valu 107Why i thi indicator important? 107How do I maur it? 108Cot/ort in collcting th data 109Targt tting/bnchmark 110Tip/warning 110Rrnc 111

24 Cutomr turnovr rat 113Why i thi indicator important? 113



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xiv CONTeNTs

Rrnc 116

25 Cutomr ngagmnt 117Why i thi indicator important? 117


26 Cutomr complaint 121Why i thi indicator important? 121


PART THREE Marketig ad sales perspective 127

27 Markt growth rat 129Why i thi indicator important? 129How do I maur it? 130Cot/ort in collcting th data 130Targt tting/bnchmark 130Tip/warning 131Rrnc 131

28 Rlativ markt har 133Why i thi indicator important? 133How do I maur it? 134Cot/ort in collcting th data 135Targt tting/bnchmark 135Tip/warning 136Rrnc 137

29 Brand quity 139Why i thi indicator important? 139How do I maur it? 140


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xvCONTeNTs


30 Cot pr lad 143Why i thi indicator important? 143How do I maur it? 144Cot/ort in collcting th data 144Targt tting/bnchmark 144Tip/warning 146Rrnc 146

31 Convrion rat 147Why i thi indicator important? 147How do I maur it? 148Cot/ort in collcting th data 149Targt tting/bnchmark 149Tip/warning 150Rrnc 150

32 sarch ngin ranking (by kyword)and click-through rat 151Why i thi indicator important? 151How do I maur it? 152Cot/ort in collcting th data 152Targt tting/bnchmark 152Tip/warning 153

Rrnc 153

33 Pag viw and bounc rat 155Why i thi indicator important? 155How do I maur it? 156Cot/ort in collcting th data 157Targt tting/bnchmark 157Tip/warning 158Rrnc 158

34 Cutomr onlin ngagmnt lvl 159Why i thi indicator important? 159How do I maur it? 160


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xviiCONTeNTs

39 Capacity utiliation rat (CUR) 185Why i thi indicator important? 185How do I maur it? 186Cot/ort in collcting th data 186Targt tting/bnchmark 187Tip/warning 187Rrnc 187

40 Proc wat lvl 189Why i thi indicator important? 189How do I maur it? 190Cot/ort in collcting th data 191


41 Ordr ulflmnt cycl tim (OFCT) 193Why i thi indicator important? 193How do I maur it? 194Cot/ort in collcting th data 194


42 Dlivry in ull, on tim (DIFOT) rat 197Why i thi indicator important? 197How do I maur it? 198Cot/ort in collcting th data 198


43 Invntory hrinkag rat (IsR) 201Why i thi indicator important? 201How do I maur it? 202Cot/ort in collcting th data 202



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xviii CONTeNTs

44 Projct chdul varianc (PsV) 205Why i thi indicator important? 205How do I maur it? 206Cot/ort in collcting th data 207Targt tting/bnchmark 207Tip/warning 207Rrnc 208

45 Projct cot varianc (PCV) 209Why i thi indicator important? 209How do I maur it? 210Cot/ort in collcting th data 210


46 earnd valu (eV) mtric 213Why i thi indicator important? 213How do I maur it? 214Cot/ort in collcting th data 214


47 Innovation piplin trngth (IPs) 217Why i thi indicator important? 217How do I maur it? 218Cot/ort in collcting th data 218


48 Rturn on innovation invtmnt (ROI2) 221Why i thi indicator important? 221How do I maur it? 222Cot/ort in collcting th data 222



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xixCONTeNTs

49 Tim to markt 225Why i thi indicator important? 225How do I maur it? 226Cot/ort in collcting th data 227Targt tting/bnchmark 227Tip/warning 228Rrnc 228

50 Firt pa yild (FPY) 229Why i thi indicator important? 229How do I maur it? 230Cot/ort in collcting th data 230


51 Rwork lvl 233Why i thi indicator important? 233How do I maur it? 234Cot/ort in collcting th data 235


52 Quality indx 237Why i thi indicator important? 237How do I maur it? 238Cot/ort in collcting th data 239


53 Ovrall quipmnt ctivn (Oee) 241Why i thi indicator important? 241How do I maur it? 242Cot/ort in collcting th data 242



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xx CONTeNTs

54 Proc or machin downtim lvl 247Why i thi indicator important? 247How do I maur it? 248Cot/ort in collcting th data 248Targt tting/bnchmark 249Tip/warning 249Rrnc 249

55 Firt contact rolution (FCR) 251Why i thi indicator important? 251How do I maur it? 252Cot/ort in collcting th data 253


PART FIVE Employee perspective 255

56 Human capital valu addd (HCVA) 257Why i thi indicator important? 257How do I maur it? 258Cot/ort in collcting th data 258Targt tting/bnchmark 258Tip/warning 259Rrnc 259

57 Rvnu pr mploy (RPe) 261


58 employ atiaction indx 265

Why i thi indicator important? 265How do I maur it? 266Cot/ort in collcting th data 267Targt tting/bnchmark 267


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xxiCONTeNTs


59 employ ngagmnt lvl 269


60 sta advocacy cor 273


61 employ churn rat 277


62 Avrag mploy tnur 281Why i thi indicator important? 281How do I maur it? 282Cot/ort in collcting th data 282Targt tting/bnchmark 282Tip/warning 283Rrnc 284

63 Abntim Bradord actor 285Why i thi indicator important? 285



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xxii CONTeNTs

Rrnc 288

64 360-dgr dback cor 289Why i thi indicator important? 289


65 salary comptitivn ratio (sCR) 295Why i thi indicator important? 295


66 Tim to hir 299Why i thi indicator important? 299


67 Training rturn on invtmnt 303Why i thi indicator important? 303How do I maur it?

304


PART SIX Corporate social resposibility perspective 309

68 Carbon ootprint 311Why i thi indicator important? 311How do I maur it? 312


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xxiiiCONTeNTs


69 Watr ootprint 317Why i thi indicator important? 317How do I maur it? 318Cot/ort in collcting th data 319Targt tting/bnchmark 319Tip/warning 320Rrnc 320

70 enrgy conumption 321Why i thi indicator important? 321How do I maur it? 322Cot/ort in collcting th data 322Targt tting/bnchmark 322Tip/warning 323Rrnc 323

71 saving lvl du to conrvationand improvmnt ort 325Why i thi indicator important? 325How do I maur it? 326Cot/ort in collcting th data 326Targt tting/bnchmark 326Tip/warning 327

Rrnc 327

72 supply chain mil 329Why i thi indicator important? 329How do I maur it? 330Cot/ort in collcting th data 330Targt tting/bnchmark 330Tip/warning 331Rrnc 331

73 Wat rduction rat 333Why i thi indicator important? 333How do I maur it? 334


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xxiv CONTeNTs


74 Wat rcycling rat 337Why i thi indicator important? 337How do I maur it? 338Cot/ort in collcting th data 338Targt tting/bnchmark 338Tip/warning 339Rrnc 339

75 Product rcycling rat 341Why i thi indicator important? 341How do I maur it? 342Cot/ort in collcting th data 342Targt tting/bnchmark 342Tip/warning 343Rrnc 343

Idex 344


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xxv

Introduction

KPIs are vital management tools

Key perormace idicators (KPIs) are the vital avigatio istrumets used by

maagers to uderstad whether their busiess is o a successul voyage or

whether it is veerig o the prosperous path. The right set o idicators will shie

light o perormace ad highlight areas that eed attetio. What gets measured

gets doe ad i you cat measure it, you cat maage it are just two o the

popular sayigs used to highlight the critical importace o metrics. Without theright KPIs maagers are sailig blid.

The problem is that most maagers are strugglig to uderstad ad idetiy

the vital ew maagemet metrics ad istead collect ad report a vast amout o

everythig that is easy to measure. As a cosequece they ed up drowig i data

while thirstig or iormatio.

Eective maagers ad decisio makers uderstad the perormace o all

key dimesios o their busiess by distillig them dow ito the critical KPIs. not

uderstadig key metrics ca ote cause axiety ad ca hold people back. This

book will demystiy ad explai i simple terms the most importat KPIs i use

today. It will equip you with the skills to uderstad, measure ad iterpret the most

importat aspects o ay busiess.

How to use this book

You ca use this book i two ways: as a essetial reerece guide that allows you

to look up the KPIs you wat to uderstad ad lear more about as ad whe

you eed it; or you ca use it to help you complete your perormace maage-

met ramework, busiess dashboard, balaced scorecard or busiess itelligece

strategy.

Perormace rameworks, dashboards or scorecards are used by compaies to

group KPIs together ito displays or reports so that they provide at-a-glace over-

views o how the busiess (or busiess uits) is perormig. To acilitate the desig

o dashboards ad scorecards, the KPIs i this book are grouped ito the ollowig

key busiess perspectives that are shared across most orgaisatios, irrespective

o type or idustry sector:

M Fiacial perspective

M Customer perspective

M Marketig ad sales perspective


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xxvi INTRODUCTION

M Operatioal processes ad supply chai perspective

M Employee perspective

M Corporate social resposibility perspective

Each KPI i this book is described usig the same ramework outliig why the KPIis importat ad what it measures, how the data are collected ad how it is calcu-

lated. Each KPI descriptio also icludes a practical example as well as tips o data

sources, target settig ad bechmarkig, measuremet requecy, pitalls, cost

ad eort o creatig the data, ad reereces.

KPIs have to measure what matters

For KPIs to be the vital avigatio istrumets that help you uderstad whether

your busiess is o the right track or ot, we have frst to defe the strategy ad

the closely lik our KPIs to that. Too may orgaisatios all ito the trap o retro-

fttig objectives to existig ad established metrics: which is simply back to rot.

KPI developmet has to start with your strategy ad the objectives the busiess is

aimig to achieve.

I sped most o my lie helpig orgaisatios defe their strategy, develop dash-

boards ad scorecards, ad develop the KPIs they eed to moitor ad maage

their busiess. I you would like practical step-by-step guidace o how to develop

ad use a perormace maagemet system, I would reer you to my most recet

books, The Intelligent Company (or commercial compaies) ad More with Less(or govermet ad ot-or-proft orgaisatios). They will guide you through the

process ad make a perect compaio to this book.

Oe importat poit I make i my other books that is worth repeatig here is

that KPIs eed to give us iormatio ad aswers to what we eed to kow. What

we have to make sure is that we kow what our iormatio eeds are ad what

questios we wat aswered beore we itroduce ay KPIs. This is why I have

developed the cocept o Key Perormace Questios or KPQs or short. A KPQ is a

maagemet questio that captures exactly what it is that maagers eed to kow.

The ratioale or KPQs is that they ocus our attetio o what actually matters mostad thereore provide guidace or choosig the most meaigul KPIs.

May o my cliets ow use the cocept o KPQs i ager to guide their KPI

selectio ad to provide cotext or their KPI reportig. Take Google or istace

oe o todays most successul ad most admired compaies. Googles execu-

tive chairma Eric Schmidt ow says: We ru the compay by questios, ot by

aswers. So i the strategy process weve so ar ormulated 30 questios that we

have to aswer [. . .] You ask it as a questio, rather tha a pithy aswer, ad that

stimulates coversatio.

I this book I have created a KPQ or each KPI that is icluded. This gives youurther cotext or each KPI ad provides you with a startig poit or usig KPQs

i your ow busiess.


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xxviiINTRODUCTION

Your unique set o KPIs

I have always stressed the importace o desigig KPIs based o your ow uique

circumstaces ad iormatio eeds. However, what I have leart over the may

years o helpig leadig compaies ad govermet orgaisatios with their per-ormace maagemet ad busiess itelligece is that there are some importat

(ad iovative) KPIs everyoe should kow about. They will give you a solid base

o kowledge. However, there will be other, more specialised measures desiged

or your specifc strategy or idustry cotext. Take, or example, the etwork

perormace KPIs or a telecom operator or the quality idicators or healthcare

providers. These will have to be icluded i your list o KPIs but will ot be oud

i this book, at least ot i their idustry-specifc ormat. For a wide-ragig list o

busiess metrics I would like to reer you to the olie KPI Library o the Advaced

Perormace Istitute (www.ap-institute.com). There you will also fd relevatwhite papers ad case studies o the topic.

A fnal note: management is not a numbers game

It might seem strage to ed the itroductory chapter o this book by statig that

KPIs shouldnotprimarily be about measuremet. Rather, the ocus should be o

selectig a robust set o value-addig idicators that serve as the begiig o a

rich perormace discussio ocused o the delivery o your strategy.

Let me make the poit that maagemet is ot a umbers game. There is a real

temptatio that maagers will ru their compay o the KPI data they are receivig.

What I wat you to remember is that behid every umber are real people, such as

customers who have purchased goods or services or employees who are satisfed

or ot. Always make sure you look behid the ace value o your KPIs to get a real

sese o their meaig.


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xxviii

Publishers acknowledgements

We are grateful to the following for permission to reproduce copyright material:

Example o p36 adapted rom Buildig ad Commuicatig Shareholder Value,

Business Intelligence (2000), with kid permissio o James Creelma; Example

o p60 adapted rom KPI 13 (D/E ratio), www.ool.com/ivestig/value/2007/06/20/

usig-the-debt-to-equity-ratio.aspx, 2007 The Motley Fool, LLC (www.ool.

com); Table o p134 adapted rom www.bcg.com. Adapted rom The BCG

Portolio Matrix. From the Product Portolio Matrix, 1970, The Bosto Cosultig

Group; Table o pp 1412 adapted rom www.iterbrad.com, Iterbrad, 2010;Example o p162 adapted rom http://marketigroi.wordpress.com/2007/10/02/

customer-egagemet-is-measurable/, with kid permissio o Ro Shevli; Extract

o p190 rom www.sprickstegall.com/blog-the-laboratory-strategy-space. 8 Lea

Wastes-3 Optioal Metrics or Each. Author: Susa Stegall. Posted Jauary 27,

2010, Susa Stegall ad Leslie Sprick (Sprickstegall); Example o p195 adapted

rom http://Satistar.com/Whitepapers/Cycle%20Time%20Reductio.pd, with kid

permissio o SatiStar Corporatio; Table o p235 adapted rom www.oee.com,

Vore Idustries, Ic.; Example o p306 adapted rom Buildig ad Developig a

HR Scorecard, Business Intelligence (James Creelma 2001), with kid permissioo James Creelma; Table o p323 adapted rom www.tu.ac.uk/ecoweb/docu-

met_uploads/94617.pd

In some instances we have been unable to trace the owners of copyright material,

and we would appreciate any information that would enable us to do so.


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1

[ ]

Fiacial prspctiv

PA R T o n e


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3

nt prt 1

Why is this indicator important?

Prts ar imprtat r all busisss rgardlss whthr thy ar i th privat r

public sctr. Simply put: th vry atur busiss is t prduc gds r srvicsthat yu ca sll r a acial rtur r rward. Takig away th csts prducig

gds ad prvidig srvics rm th rvu r sals yu ar gratig will lav

yu with yur prts.

Fr ay busiss, t prt (als rrrd t as t icm) typically rprsts

th mst imprtat masur prrmac. nt prt shws us whthr thr is

still ay my lt vr atr dductig all csts ad xpss. Th prts ca th

b rivstd t grw th cmpay (calld rtaid arigs) ad usd t pay a

rtur t th cmpays wrs r sharhldrs (calld dividds).

It is vital r maagrs ad ivstrs t kw whthr thir cmpays activitistraslat it bttm-li prrmac. Fr istac, a cmpay ca hav grat

sals gurs but i thy dt grat a surplus th th cmpay will s b i

trubl.

Strategic perspective

Financial perspective

Key perormance question this indicator helps to answer

To what extent are we generating bottom-line results?


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Financial perspective4

How do I measure it?

Data collection method

Th data r th t prt mtric ar cllctd rm th icm statmt (s th

xampl th xt pag).

Formula

n f ($) 5 s ($) 2 t ($)

Hr is hw yu rach t prt a P&L (Prt & Lss) accut:

1 Sals rvu 5 Pric ( prduct) 3 Quatity sld

2 Grss prt 5 Sals rvu 2 Cst sals ad thr dirct csts

3 opratig prt (eBIT, arigs br itrst ad taxs) 5

Grss prt 2 ovrhads ad thr idirct csts

4 Prtax prt (eBT, arigs br taxs) 5 opratig prt 2 o-

itms ad rdudacy paymts, sta rstructurig 2 Itrst payabl

5 Net proft5 Pr-tax prt 2 Tax

6 Rtaid arigs 5 nt prt 2 Dividds

Frequencynt prt is usually masurd ach mth as part icm statmt prparati.

Source of the data

Th t prt data ar xtractd rm th radily availabl accutig data.

Cost/eort in collecting the data

Th csts prducig th t prt masur ar usually lw as lg as a cmpay

has th rlvat accutig irmati availabl. As mst cmpais hld this

data i xistig accutig systms it is just a mattr addig a calculati ruti

t th xistig systm.

Target setting/benchmarks

nt prt margis vary by idustry, but all ls big qual, th highr a cmpayst prts th bttr.


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1 net proFit 5

Example Csidr th llwig tw xampls. Th rst xplais i ar-rativ rm hw Da Mauacturig (a ctitius cmpay) calculats t

prt, whil th scd prvids a icm statmt xampl rm Grad

Crprati (als ctitius).

I 2011, Da Mauacturig sld 100,000 widgts r $5 ach, with a cst

gds sld $2 ach. It had $150,000 i pratig xpss, ad paid

$52,500 i icm taxs.

T calculat th t prt th rgaisati rst ds t d th rvu r

ttal sals. I Das sld 100,000 widgts at $5 ach, it gratd a ttal

$500,000 i rvu. Th cmpays cst gds sld was $2 pr widgt;

100,000 widgts at $2 ach is qual t $200,000 i csts. This lavs a grss

prt $300,000 ($500k rvu 2 $200k cst gds sld). Subtractig

$150,000 i pratig xpss rm th $300,000 grss prt lavs us with

$150,000 icm br taxs. Subtractig th tax bill $52,500, w ar lt

with a t prt $97,500.

Grande Corporation

Income Statement for Year Ending 31 December 2011

Figures in 1,000s

Grss sals rvus 33,329

Lss rturs & allwacs 346

nt sals rvus 32,983

Cost of goods sold

Dirct matrials 6,320

Dirct labur 6,100

Manufacturing overhead

Idirct labur 5,263

Dprciati, mr quip 360

othr mr vrhad 4,000

nt mr vrhad 9,623

nt cst gds sld 22,043

Grss prt 10,940

Operating expenses

Sllig xpss


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Income Statement for Year Ending 31 December 2011

Sals salaris 4,200

Warraty xpss 730

Dprciati, str quip 120

othr sllig xpss 972

Ttal sllig xpss 6,022

Gral & admi xpss

Admiistrati salaris 1,229

Rt xpss 180

Dprciati, cmputrs 179

othr gl & admi xp 200

Ttal gl & admi xp 1,788

Ttal pratig xpss 7,810

opratig icm br taxs 3,130

Financial revenue & expenses

Rvu rm ivstmts 118

Lss itrst xps 511

nt acial gai (xps) (393)

Icm br tax & xtrardiary itms 2,737

Lss icm tax pratis 958

Icm br xtrardiary itms 1,779

Extraordinary items

Sal lad 610

Lss iitial cst 145

nt gai sal lad 465

Lss icm tax gai 118

extrardiary itms atr tax 347

Net proft (income) 2,126


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9

nt prt margi 2


With th prvius KPI w lkd at t prt as a ttal umbr. I rdr t mak

t prts mr cmparabl ad t udrstad hw much prt a cmpay maks

r ach dllar i rvu w ca prduc th t prt margi (als rrrd t as

rtur sals r t icm margi), which taks th t prt a cmpay as

a rati vr its ttal sals r rvus.

Th t prt margi is thrr a ky idicatr hw wll a cmpay is ru

(i.. hw cit it is ad hw wll it ctrls its csts), as a lw t prt margi

culd idicat t high pratig csts r a wrg pricig structur.

Lw t prt margis ma that a cmpay has a lwr margi saty

ad that small chags such as a slight dcli i sals r a ris i pratig

xpss, .g. highr ul r lctricity bills r a hik i raw matrial prics, culdquickly dimiish ay rturs ad tur th cmpay rm a prtabl busiss t a

lss-makr.

Fr maagrs, t prt margis ar particularly usul wh cmpard vr

tim ad rlativ t thr cmpais i th sam sctr. Ivstrs t cmpar




How much proft are we generating or each dollar in sales?


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t prt margis acrss idustris t idtiy th mst prtabl ad attractiv

sctrs ad cmpais t ivst i.



Th data r th t prt margi mtric ar cllctd rm th icm statmt

(s prvius KPI).

Formula

n f 5(n f__________r)3 100Frequency

Usually masurd ach mth as part th icm statmt prparati.

Source of the data

Th t prt ad rvu data ar xtractd rm th accutig data.

Cost/eort in collecting the dataTh csts prducig th t prt masur ar usually lw as lg as a cmpay

has th rlvat accutig irmati availabl. As mst cmpais hld this

data i xistig accutig systms it is just a mattr addig a calculati ruti

t th xistig systm.


nt prt margis vary by idustry, but all ls big qual, th highr a cmpaysprt margi cmpard t its cmptitrs, th bttr. As a vry gral ball-park

bchmark (which will dpd a lt th idustry), a t prt margi btw

20% ad 40% is csidrd t b vry gd. Hr ar sm xampls th mst

prtabl cmpais i th S&P 500 (a listig th biggst ad bst public cm-

pais i Amrica):

M Public Strag (nYSe:PSA) 5 46.14%

M Crig Icrpratd (nYSe:GLW) 5 45.65%

M Altra Crprati (nASDAQ:ALTR) 5 40.97%M Liar Tchlgy Crprati (nASDAQ:LLTC) 5 39.14%

M CMe Grup Ic. (nASDAQ:CMe) 5 37.20%

Th avrag t prt margi r all S&P 500 cmpais is arud 10%.


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2 net proFit margin 11

Tips/warnings

As with t prts, t prt margis ca als b masurd by busiss uit r

v by prduct r srvic, which t givs mr itrstig isights.

Reerences

www.investopedia.com/terms/p/proftmargin.asp

www.in-business.org.uk/ormula-or-calculating-net-proft-margin/

www.ccdconsultants.com/documentation/fnancial-ratios/net-proft-margin-

interpretation.html

Example I th prvius KPI dscripti w calculatd th t prt ad tsals rvus r Grad Crprati basd its icm statmt (s

pags 56).

T gt t th t prt margi w simply divid th tw umbrs as llws:

Net proft margin Net proft_________________

Net sales revenues

Net proft margin $2,126,000___________

$32,983,000

Net proft margin 6.4%


32/48


33/48

13

Grss prt margi 3


Athr prtability rati which is widly usd is th grss prt margi. Istad th t prt margi, whr w ar dductig all csts rm th rvu, hr w

ar ly dductig th cst gds sld (smtims rrrd t as cst sals).

Csts gds ar th dirct prducti ad distributi csts a cmpay icurs

r supplis, ivtry, prducti ad distributi thir prducts r srvics.

Lkig at hw much it csts a cmpay t prduc its gds ad srvics ad

puttig this i rlati t sals rvu givs us a rati prducti cicy. A

grss prt margi 30% wuld idicat that r ach dllar i sals, th cmpay

spt 70 cts i dirct csts t prduc th gd r srvic that th rm sld.

Th grss prt margi basically shws us hw much rm ach dllar a cm-pays rvu is lt atr takig away th cst gds sld, ad thrr hw

much my is availabl t cvr vrhad, thr xpss ad curs rtaid

arigs ad dividds. This als mas that grss prt margi shuld b much

highr tha th t prt margi (s prvius KPI).




How much proft are we generating or each dollar in sales?


34/48


A high grss prt margi wuld idicat that a cmpay is likly t mak a

rasabl prt as lg as it kps th rmaiig csts udr ctrl. A lw grss

prt margi th thr had wuld idicat that th prducti csts ar t

high ad that its prducti cicy is t maagd t a apprpriat lvl.

Fr maagrs, grss prt margis ar particularly usul wh cmpard vrtim ad rlativ t thr cmpais i th sam sctr. Ivstrs t cmpar

grss prt margis acrss idustris t idtiy th mst prtabl ad attractiv

sctrs ad cmpais t ivst i.



Th data r grss prt margi ar capturd thrugh th mthly maagmtaccutig prcss ad rprtd i th Prt ad Lss statmt.

Formula

g f 5((r c d d)_____________________________r )3 100Frequency

Ttal grss prt margi is calculatd mthly as part th rmal maagmtrprtig cycl.

Source of the data

Th rvu ad cst gds sld ar xtractd rm th accutig data.


Calculatig grss prt margi is a stadard masurmt withi cmmrcial

rgaisatis ad thr is cst r rt rquird i cllctig th data abv,

which ar dd r mthly ad thr prid accutig purpss.


Grss prt margis vary by idustry, but all ls big qual, th highr a cm-

pays prt margi cmpard t its cmptitrs, th bttr. I sm idustris, lik

clthig r xampl, grss prt margis ar xpctd t b ar th 40% mark,

as th gds d t b bught rm supplirs at a crtai rat br thy ar

rsld. I thr idustris such as stwar prduct dvlpmt, whr th cst

duplicati is gligibl, th grss prt margi ca b highr tha 80%.


35/48

3 gross proFit margin 15

Als, a cmpays grss prt margi shuld b stabl. It shuld t fuctuat

much rm prid t athr, ulss th idustry i which it prats has b

udrgig drastic chags which will act th cst gds sld r pricig

plicis.

Example Simply put, grss prt margi rprsts th dirc btwttal sals ad th cst ths sals.

Fr xampl: I ttal sals qual $1,000 ad cst sals quals $300, th

th margi qual $700.

Grss prt margi ca b xprssd as a mtary valu r as a pr-

ctag. As a prctag, th grss prt margi is statd as a prctag

rvus.

Th quati: (Rvu 2 Cst gds sld)/Rvu 5 Grss prtmargi. Usig th prcdig xampl, th margi wuld b 70%.

($1,000 $300)_______________

$1,000 3 100 70%

Basically, 70% grss prt margi mas that r vry dllar gratd

i sals, th cmpay has 20 cts lt vr t cvr thr xpss ad

prt.

Tips/warnings

Althugh a imprtat crprat masur, bttr prrmac isights ca b

glad by aalysig grss prt margi at th busiss uit, dpartmt r

prduct lvl. This ca prvid usul data th ral drivrs prt withi th

trpris.

It is als wrth barig i mid that markup ad grss prt margi a sigl

prduct, r grup prducts, ar t, as may rrusly bliv, th sam

thig. Grss prt margi is a prctag th sllig pric, whil markup is tra-ditially gurd as a prctag th sllrs cst.

Usig th umbrs rm th prcdig xampl, i a rgaisati purchass

gds r $300 ad prics thm r sal at $1,000, th markup is $700. As a pr-

ctag, this markup cms t 233%:

($1,000 2 $300)_______________$300

3 100 5 233%

I thr wrds, i yur busiss rquirs a 70% margi t shw a prt, yur

avrag markup will hav t b 233%.

This xampl shws that althugh markup ad margi may b th sam idllars ($700), thy rprst tw dirt ccpts as prctags (233% vrsus

70%). Mr tha a w w busisss hav aild t mak thir xpctd prts

bcaus th wrs assumd that i thir markup is X%, thir margi will als

b X%. This is t th cas.


36/48


Reerences

www.investopedia.com/articles/undamental/04/042804.

asp#axzz1U9QWeAQD

http://bizfnance.about.com/od/fnancialratios/a/Proftability_Ratios.htm

http://beginnersinvest.about.com/od/incomestatementanalysis/a/gross-proft-

margin.htm

www.ccdconsultants.com/documentation/fnancial-ratios/gross-proft-margin-

interpretation.html


37/48

17

opratig prtmargi 4


Athr prtability masur usd i cmpais is th pratig prt margi (r

pratig margi r shrt). It ca prvid isights it a cmpays pratigcicy ad pricig stratgy. By dividig th pratig icm by rvu it

masurs th prprti rvu that rmais atr dductig th csts pr-

atig th busiss, icludig csts r labur, raw matrial, vrhad, dprciati,

amrtisati, sllig, advrtisig, admi, tc.).

Bcaus pratig icm icluds ly th sals rvu rm rgular busi-

ss pratis (ad t rvus rm xtrardiary itms, taxs, ad itrst

lg-trm liabilitis), th rati prvids a isight it th prtability sals gr-

atd rm rgular pratis th busiss.

Basically, it tlls hw much my a cmpay maks (br itrst ad taxs) ach dllar sals. Th pratig prt margi ca b usd t udrstad

whthr th csts pratig a busiss ar t high r th prducti r sals

vlum (spcially wh cmpard t similar cmpais i th sam sctr). I

cmpais hav a high pratig prt margi cmpard t cmptitrs, this ca




To what extent are we operating our business efciently?


38/48


t idicat that it was abl t crat a lwr-cst pratig mdl. Th xampl

that is t usd is Wal-Mart, which wig t its warhus ad distributi -

cicy is abl t rduc th csts gttig prducts it its shps.

High pratig prt margis shw that a cmpay is maagig its pratig

csts wll. I maagmt is abl t icras th pratig prt margi vr timth this shws that th cmpay is arig mr pr dllar sals, r that sals

ar icrasig astr tha pratig csts.



Th data r th pratig prt margi ar capturd thrugh th mthly maag-

mt accutig prcss ad rprtd i th icm statmt.

Formula

o f 5(o f_______________r )3 100W o f 5 eBit (e b d x).

Frequency

opratig prt margi is usually calculatd mthly r quartrly as part th

rmal maagmt rprtig cycl.

Source of the data

Th rvu ad cst gds sld ar xtractd rm th accutig data.

Cost/eort in collecting the dataCalculatig pratig prt margi is a stadard masurmt withi cmmrcial

rgaisatis ad thr is cst r rt rquird i cllctig th data abv,

which ar dd r mthly ad thr prid accutig purpss.


opratig prt margis vary by idustry, but all ls big qual, th highr a

cmpays pratig prt margi cmpard t its cmptitrs, th bttr. Hr

ar sm bchmarks rm sm th mst prtabl cmpais i th S&P 500:

M Public Strag (nYSe:PSA) 5 42.17%

M Crig Icrpratd (nYSe:GLW) 5 24.96%


39/48

4 operating proFit margin 19

M Altra Crprati (nASDAQ:ALTR) 5 45.46%

M Liar Tchlgy Crprati (nASDAQ:LLTC) 5 51.42%

M Visa Ic. (nYSe:V) 5 57.93%

ovrall, S&P 500 cmpais avrag a pratig prt margi arud 15%.

Example Hr is a xampl calculati with gurs tak rm thCslidatd Statmts Icm:

(In millions)

Grss Prt $20,000

opratig Icm $5,000

nt Icm $4,000

opratig Prt Margi 5( 4,000_______20,000)3 100 5 20%Tips/warnings

opratig prt margi is a masur that ca b usd t cmpar cmpais that

d t issu a sparat disclsur thir cst gds sld gurs (which ar

dd t calculat th grss prt margi).

Reerences

http://beginnersinvest.about.com/od/incomestatementanalysis/a/operating-

income-operating-margin.htm

www.investopedia.com/articles/stocks/08/operating-margins.

asp#axzz1UA03Rbu5

www.wikinvest.com/metric/Operating_Margin

www.investopedia.com/articles/undamental/04/042804.

asp#axzz1U9QWeAQD


40/48


41/48

21

eBITDA 5


Athr acial prrmac idicatr is eBITDA, r earigs Br Itrst,

Taxs, Dprciati ad Amrtisati. It is sstially takig sals rvu ad

subtractig all xpss thr tha itrst, taxs, dprciati ad amrtisati.

eBITDA is thrr a masur a cmpays pratial prtability vr tim,

but takig ut th pttially distrtig cts chags i itrst, taxs, dprciati

ad amrtisati, which ca all b maipulatd by acig ad accutig dcisis.

Th argumt r usig eBITDA is that it allws us t bttr cmpar cmpais ad

thir pratial prtability withut takig it accut thir capital structur.

First usd i th 1980s, eBITDA has grw t b particular itrst t

rgaisatis that hav larg amuts xd assts which ar subjct t havy

dprciati chargs (such as mauacturig cmpais) r i th cas whr acmpay has a larg amut acquird itagibl assts its bks ad is thus

subjct t larg amrtisati chargs (such as a cmpay that has purchasd a

brad r a cmpay that has rctly mad a larg acquisiti). Dprciati ad

amrtisati ar dd i th wrkig xampl pags 2223.




To what extent are we operating our business efciently to generate profts?


42/48




eBITDA ca b calculatd usig th cmpays icm statmt ad accutig

data.

Formula

eBitDa 5 r 2 ex (xd , x, d d

)

Frequency

As with ay arigs r cash-fw mtric, eBITDA is usually calculatd a

quartrly r mthly basis. But rgaisatis will typically prjct eBITDA vr a

12-mth prid ad rprt vr th prvius 12-mth prid.

Source of the data

Th eBITDA data ca b xtractd rm th icm statmt.


Th cst cllctig th data r th eBITDA mtric is small as th data has t

b cllctd ayway r accutig purpss. Thrr th rt t ppulat th

mtric is als lw.


May rgaisatis will st eBITDA targts ad rprt ths t th ivstmt cm-

muity. Th actual gur will dpd th idustry ad cmparig prrmac

will b agaist thrs i th sam idustry. Lik ay prtability masur, as lg as

th umbr is psitiv yu ar th hk, ad th biggr th bttr.

Example Th eBITDA calculati ca b mad as llws:

1 Calculat t icm. T calculat t icm btai ttal icm adsubtract ttal xpss.

2 Dtrmi icm taxs. Icm taxs ar th ttal amut taxs

paid t th gvrmt.


43/48

5 eBitDa 23

Tips/warnings

A cmm misccpti is that eBITDA rprsts cash arigs. eBITDA is a

gd mtric t valuat prtability, but t cash fw.

eBITDA als lavs ut th cash rquird t ud wrkig capital ad th

rplacmt ld quipmt, which ca b sigicat. Thrr eBITDA t

cms i r criticism as it dst tll th ull stry a rgaisatis acial

prrmac. It is rcmmdd, as with mst th acial masurs, that t

gt a ullr pictur a cmpays acial halth it is imprtat t us eBITDA

algsid thr acial mtrics.

As eBITDA is a -GAAP (Grally Accptd Accutig Pricipls a st ruls that accutats llw) masur, it allws a gratr amut discrti as

t what is (ad is t) icludd i th calculati. This als mas that cmpais

t chag th itms icludd i thir eBITDA calculati rm rprtig

prid t th xt, which ca caus cusi.

3 Cmput itrst chargs. Itrst is th paid t cmpais r

idividuals that rimburss th idividual r cmpais r th us

crdit r currcy.

4 establish th cst dprciati. Dprciati is th trm usd td a cash (machis r prprty) r -cash asst (a cpyright, a

tradmark r brad am rcgiti) that lss valu vr tim whthr

thrugh agig, war ad tar, r th assts bcmig bslt. T

xplai, mst assts ls thir valu vr tim (i thr wrds, thy

dprciat), ad must b rplacd c th d thir usul li is

rachd. Thr ar svral accutig mthds that ar usd i rdr

t writ a assts dprciati cst vr th prid its usul li.

Bcaus it is a -cash xps, dprciati lwrs th cmpays

rprtd arigs whil icrasig r cash fw (th cash that acmpay is abl t grat atr layig ut th my rquird t

maitai r xpad its asst bas).

5 Ascrtai th cst amrtisati. Amrtisati is a mthd

dcrasig th amuts acial istrumts vr tim, icludig

itrst ad thr ac chargs. As a xampl amrtisati,

supps XYZ Bitch spt $30 milli a pic mdical quipmt

ad that th patt th quipmt lasts 15 yars; this wuld ma

that $2 milli wuld b rcrdd ach yar as a amrtisati xps.

Whil amrtisati ad dprciati ar t usd itrchagably,tchically this is a icrrct practic bcaus amrtisati rrs t

itagibl assts ad dprciati rrs t tagibl assts.

6 Add all prviusly dd cmpts. Th rsultig gur is th

subtractd rm ttal xps. This al gur is th subtractd rm

ttal rvu t arriv at eBITDA.


44/48


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25

Rvu grwth rat 6


It is th basic act busiss that cmmrcial rgaisatis xist t mak my.

Ad althugh thr ar a umbr actrs t csidr, th primary drivr

makig my is t grw rvus.

Rvu (smtims rrrd t as turvr r sals) is simply th icm that

a cmpay rcivs rm its rmal busiss activitis, usually th sal gds

ad/r srvics.

I accutig trms rvu rprsts th tp li, t dt hw it is

rprtd a icm statmt (at th vry tp). Th bttm li dts t

prt (what is lt rm th rvus c all xpss ar dductd).

Grally, rvu might b udrstd as icm rcivd by a rgaisati

i th rm cash r cash quivalts. Hwvr, sals rvu ca b dscribdas icm rcivd rm sllig gds r srvics vr a giv prid tim.

Althugh rvu grwth is a simpl masur (i that all that is big masurd

is th rat icras i th grwth rvus), its imprtac cat b udr-

stimatd. Grwth gurs ar, curs, a primary cus sir maagmt




How well are we growing the business?


46/48


tams as thy dt hw wll a rgaisatis stratgic ad pratial gals

ar big ralisd.

Mrvr, grwth gurs ar durig itrst t th ivstmt cmmuity.

Simply put, i a cmpay ca dmstrat slid tp-li grwth, aalysts might

viw this as psitiv, v i bttm-li grwth is sluggish. It has lg b rc-gisd that csistt rvu grwth is csidrd sstial r a cmpays

publicly tradd stck t b attractiv t ivstrs.

Aalysts (ad idd sir tams ad v cmptitrs) will lk at rvu

grwth cmpard t a prvius prid (mst likly a quartr r sris quartrs).

Th currt quartrs sals gur will als usually b cmpard a yar-vr-yar basis. Such aalyss prvid isights it hw much a cmpayssals aricrasig vr tim ad thrr hw wll th rgaisati is prrmig, sp-

cially i cmparis t th cmptiti.



Sals rvu data ar cllctd rm a rgaisatis gral ldgr (th mai

accutig rcrd a busiss) ad will b summarisd pridically udr th

hadig Rvu r Rvus a icm statmt. Rvu accut ams

dscrib th typ rvu, such as Rpair srvic rvu, Rt rvu

ard r Sals.

Formula

Rvu grwth is simply this quartrs (r ay thr tim prid) rvu cm-

pard t that a prvius quartr (r ay thr tim prid).

Frequency

Rvus ar calculatd mthly ad rprtd i th mthly maagmt

accuts. Grwth rats might b rprtd a quartrly basis with multi-quartr

ad/r yar--yar cmpariss.

Source of the data

This data ca b xtractd rm th gral ldgr ad capturd i th icm

statmt.


By law, rgaisatis must captur ad rprt rvu data, s thrs cst i

cllctig this data apart rm th rmal cst dig busiss. Th simplicity

calculatig grwth rats mas that thr is littl cst r rt i cllctig this data.


47/48

6 revenue groWth rate 27


Fr publicly tradd rgaisatis it is straightrward t cmpar th rvu

grwth dirt cmpais (spcially ths i th sam r similar idustris/

sctrs), as all data ar publicly availabl ad mst rgaisatis will rprt grwthrats (i t, it is simpl t calculat).

Mst cmmrcial rgaisatis will st grwth targts as a ky part thir

aual budgtig prcss. Whrvr pssibl, this shuld b basd a udr-

stadig cmptitr targts.

Blw ar sm xampl grwth rats r wll-kw cmpais acrss dirt

idustris.

Company Average revenue growth rates (over 5

years between 2007 and 2011)

Bak Amrica Just vr 3%

Walt Disy Just vr 4%

Wal-Mart Strs Abut 5.5%

Clgat-Palmliv Just udr 7%

exx-Mbil Abut 8.5%

Pzr Just udr 10%

Th Cca-Cla Cmpay Abut 15%

Appl ovr 40%

Example Rvu grwth is rmarkably simpl t masur. Fr xampl, iCmpay X gratd $91.3 billiirvu durig its urth quartr 2010ad $82.2billi i th third quartr that yar, th cmpay wuld hav squartrly rvu grwth 11% squtially. I Cmpay Xgratd $80.2billi i th urth quartr 2009, th cmpay wuld hav s its rvu

icras 13.8% a yar-vr-yar basis.

Tips/warnings

Althugh rvu ad, i particular, rvu grwth is a critical masur busi-ss prrmac, busiss succss als rquirs attti t b paid t thr

acial barmtrs such as xpss as a cmpays vrall prrmac is

masurd by th xtt t which its asst ifws (rvus) cmpar with its asst

utfws (xpss). nt icm is th rsult this quati.


48/48

I start-up md, r i trig a w markt, r xampl, a rgaisati

might dcid t driv rvus whil sacricig t icm. This is a rmal busi-

ss stratgy. Wh dig s, rgaisatis must pay cls attti t cash fw,

athr th ky barmtrs a rgaisatis acial halth. Halthy cash

fw is critical t drivig grwth.

Reerences

CnnMy http://money.cnn.com/

http://money.cnn.com/magazines/ortune/ortuneastestgrowing/2010/

companies/salesgrowth/

Documents

Key Performance Indicators Sample Chapter