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ix
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
How do I maur it? 14Cot/ort in collcting th data 14Targt tting/bnchmark 14Tip/warning 15Rrnc 16
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
Why i thi indicator important? 25How do I maur it? 26Cot/ort in collcting th data 26Targt tting/bnchmark 27Tip/warning 27Rrnc 28
7 Total harholdr rturn (TsR) 29
Why i thi indicator important? 29How do I maur it? 30Cot/ort in collcting th data 30Targt tting/bnchmark 30Tip/warning 31Rrnc 31
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
How do I maur it? 46Cot/ort in collcting th data 46Targt tting/bnchmark 46Tip/warning 48Rrnc 48
11 Rturn on at (ROA) 49Why i thi indicator important? 49
How do I maur it? 50Cot/ort in collcting th data 50Targt tting/bnchmark 50Tip/warning 51Rrnc 51
12 Rturn on quity (ROe) 53Why i thi indicator important? 53
How do I maur it? 54Cot/ort in collcting th data 54Targt tting/bnchmark 54Tip/warning 55Rrnc 55
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
Targt tting/bnchmark 72Tip/warning 73Rrnc 73
17 CAPeX to al ratio 75Why i thi indicator important? 75How do I maur it? 76Cot/ort in collcting th data 76
Targt tting/bnchmark 76Tip/warning 77Rrnc 77
18 Pric/arning ratio (P/e ratio) 79Why i thi indicator important? 79How do I maur it? 80Cot/ort in collcting th data 80
Targt tting/bnchmark 80Tip/warning 81Rrnc 81
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
Tip/warning 89Rrnc 89
20 Cutomr rtntion rat 91
Why i thi indicator important? 91How do I maur it? 92Cot/ort in collcting th data 93Targt tting/bnchmark 93Tip/warning 94Rrnc 95
21 Cutomr atiaction indx 97
Why i thi indicator important? 97How do I maur it? 98Cot/ort in collcting th data 99Targt tting/bnchmark 99Tip/warning 100Rrnc 101
22 Cutomr proftability cor 103
Why i thi indicator important? 103How do I maur it? 104Cot/ort in collcting th data 105Targt tting/bnchmark 105Tip/warning 106Rrnc 106
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
How do I maur it? 114Cot/ort in collcting th data 115Targt tting/bnchmark 116Tip/warning 116
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xiv CONTeNTs
Rrnc 116
25 Cutomr ngagmnt 117Why i thi indicator important? 117
How do I maur it? 118Cot/ort in collcting th data 119Targt tting/bnchmark 119Tip/warning 120Rrnc 120
26 Cutomr complaint 121Why i thi indicator important? 121
How do I maur it? 122Cot/ort in collcting th data 123Targt tting/bnchmark 123Tip/warning 125Rrnc 125
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
Cot/ort in collcting th data 141Targt tting/bnchmark 141Tip/warning 142Rrnc 142
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
Targt tting/bnchmark 192Tip/warning 192Rrnc 192
41 Ordr ulflmnt cycl tim (OFCT) 193Why i thi indicator important? 193How do I maur it? 194Cot/ort in collcting th data 194
Targt tting/bnchmark 194Tip/warning 195Rrnc 195
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
Targt tting/bnchmark 199Tip/warning 200Rrnc 200
43 Invntory hrinkag rat (IsR) 201Why i thi indicator important? 201How do I maur it? 202Cot/ort in collcting th data 202
Targt tting/bnchmark 202Tip/warning 203Rrnc 203
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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
Targt tting/bnchmark 211Tip/warning 211Rrnc 211
46 earnd valu (eV) mtric 213Why i thi indicator important? 213How do I maur it? 214Cot/ort in collcting th data 214
Targt tting/bnchmark 214Tip/warning 215Rrnc 216
47 Innovation piplin trngth (IPs) 217Why i thi indicator important? 217How do I maur it? 218Cot/ort in collcting th data 218
Targt tting/bnchmark 218Tip/warning 220Rrnc 220
48 Rturn on innovation invtmnt (ROI2) 221Why i thi indicator important? 221How do I maur it? 222Cot/ort in collcting th data 222
Targt tting/bnchmark 223Tip/warning 223Rrnc 223
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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
Targt tting/bnchmark 231Tip/warning 231Rrnc 232
51 Rwork lvl 233Why i thi indicator important? 233How do I maur it? 234Cot/ort in collcting th data 235
Targt tting/bnchmark 235Tip/warning 236Rrnc 236
52 Quality indx 237Why i thi indicator important? 237How do I maur it? 238Cot/ort in collcting th data 239
Targt tting/bnchmark 239Tip/warning 239Rrnc 240
53 Ovrall quipmnt ctivn (Oee) 241Why i thi indicator important? 241How do I maur it? 242Cot/ort in collcting th data 242
Targt tting/bnchmark 243Tip/warning 244Rrnc 245
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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
Targt tting/bnchmark 253Tip/warning 254Rrnc 254
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
Why i thi indicator important? 261How do I maur it? 262Cot/ort in collcting th data 262Targt tting/bnchmark 262Tip/warning 263Rrnc 264
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
Tip/warning 268Rrnc 268
59 employ ngagmnt lvl 269
Why i thi indicator important? 269How do I maur it? 270Cot/ort in collcting th data 271Targt tting/bnchmark 271Tip/warning 272Rrnc 272
60 sta advocacy cor 273
Why i thi indicator important? 273How do I maur it? 274Cot/ort in collcting th data 275Targt tting/bnchmark 275Tip/warning 276Rrnc 276
61 employ churn rat 277
Why i thi indicator important? 277How do I maur it? 278Cot/ort in collcting th data 278Targt tting/bnchmark 278Tip/warning 279Rrnc 280
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
How do I maur it? 286Cot/ort in collcting th data 287Targt tting/bnchmark 287Tip/warning 288
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xxii CONTeNTs
Rrnc 288
64 360-dgr dback cor 289Why i thi indicator important? 289
How do I maur it? 290Cot/ort in collcting th data 291Targt tting/bnchmark 291Tip/warning 292Rrnc 293
65 salary comptitivn ratio (sCR) 295Why i thi indicator important? 295
How do I maur it? 296Cot/ort in collcting th data 297Targt tting/bnchmark 297Tip/warning 297Rrnc 298
66 Tim to hir 299Why i thi indicator important? 299
How do I maur it? 300Cot/ort in collcting th data 300Targt tting/bnchmark 300Tip/warning 301Rrnc 301
67 Training rturn on invtmnt 303Why i thi indicator important? 303How do I maur it?
304
Cot/ort in collcting th data 306Targt tting/bnchmark 306Tip/warning 307Rrnc 307
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
Cot/ort in collcting th data 313Targt tting/bnchmark 313Tip/warning 315Rrnc 315
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
Cot/ort in collcting th data 335Targt tting/bnchmark 335Tip/warning 335Rrnc 336
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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Financial perspective6
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
Why is this indicator important?
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
Strategic perspective
Financial perspective
Key perormance question this indicator helps to answer
How much proft are we generating or each dollar in sales?
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Financial perspective10
t prt margis acrss idustris t idtiy th mst prtabl ad attractiv
sctrs ad cmpais t ivst i.
How do I measure it?
Data collection method
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.
Target setting/benchmarks
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%
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13
Grss prt margi 3
Why is this indicator important?
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).
Strategic perspective
Financial perspective
Key perormance question this indicator helps to answer
How much proft are we generating or each dollar in sales?
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Financial perspective14
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.
How do I measure it?
Data collection method
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.
Cost/eort in collecting the 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.
Target setting/benchmarks
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%.
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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.
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Financial perspective16
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
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17
opratig prtmargi 4
Why is this indicator important?
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
Strategic perspective
Financial perspective
Key perormance question this indicator helps to answer
To what extent are we operating our business efciently?
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Financial perspective18
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.
How do I measure it?
Data collection method
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.
Target setting/benchmarks
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%
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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
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21
eBITDA 5
Why is this indicator important?
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.
Strategic perspective
Financial perspective
Key perormance question this indicator helps to answer
To what extent are we operating our business efciently to generate profts?
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Financial perspective22
How do I measure it?
Data collection method
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.
Cost/eort in collecting the data
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.
Target setting/benchmarks
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.
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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.
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25
Rvu grwth rat 6
Why is this indicator important?
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
Strategic perspective
Financial perspective
Key perormance question this indicator helps to answer
How well are we growing the business?
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Financial perspective26
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.
How do I measure it?
Data collection method
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.
Cost/eort in collecting the data
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.
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6 revenue groWth rate 27
Target setting/benchmarks
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.
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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/