Valuation Process Exploring Industry KPIs and Their Impact

Valuation Process: Exploring Industry KPIs and Their Impact

Did you know how critical key performance indicators (KPIs) are for the business valuation of a company?

Key performance indicators allow businesses to measure and prove to investors about the business growth and future potential in a reliable way.

By tracking metrics like sales growth, leads generation, conversion rates, return on investment, lifetime value of a customer, click-through rate, and overall business performance and progress, KPI reports provide businesses with proof that their business is effectively connecting with target customers, driving ROI and more.

Not to mention, you’ll have an effective way to prove to investors that your business is worth the investment. Business KPIs are one of the integral parts of any investor-led business valuation process.

Let’s explore industry KPIs in detail by discovering different types of KPIs, their importance, limitations, steps to measure, and how exactly they impact the business valuation of a company.

What Is A KPI?

There are different types of performance measures; one of them is KPI, an acronym for key performance indicators.

Key performance indicators help businesses manage performance and what to do in order to increase their performance.

Performance management is used by many businesses to ensure and enable the business to go on the right path. Key performance indicators provide quantitative information and measure performance in terms of finances, sales, cost, reliability, flexibility, safety, customer satisfaction, employee satisfaction, and so on.

In simple terms, KPIs measure business performance and progress towards their goals through tracking the effectiveness of projects, processes, campaigns, and strategic changes.

Importance Of Key Performance Indicators (KPIs)

As stated above, KPIs display measurable data demonstrating the business’s progress toward its set goals. These key performance indicators provide the business owner and investors with the significant data needed to make informed and data-driven decisions.

From an investor perspective, your business KPIs should mainly be related to the company’s financial performance, marketing, management, customer relations, and employee efficiency.

 Insightful KPIs data about the financial health and performance of the business will help you illustrate that you have a clear growth plan.

Moreover, key performance indicators are helpful in:

  • Converting ideas into manageable target 
  • Driving long-term growth 
  • Cutting down information overload
  • Achieving high-level goals
  • Offering critical insights

Different Types Of Industry KPIs

If you are business planning to raise capital, it’s vital to understand different industry KPIs and determine the one you need to measure to attract investors.

1. Quantitative KPIs

Quantitative KPIs are represented using numbers like percentages, ratios, and whole numbers. Using numbers, quantitative indicators can measure the business progress and performance.

Such KPIs are mostly straightforward, as they represent direct numerical values like customer service tickets, annual business revenue, number of closed sales, and more.

2. Qualitative KPIs

Qualitative KPIs are not represented using numerical data; instead, they measure non-numerical data such as customer and employee engagement.

For a better understanding, take a look at some examples of qualitative data.

▶️ Employee Survey: A company running an employee engagement program to track employee engagement, performance reviews, turnover rate, and feedback where performance is based on feedback from employees. 

▶️ Customer Survey: A company that launched a product, tracking qualitative data such as product reviews, customer surveys, satisfaction surveys, and engagement.

  3. Leading KPIs

Leading KPIs are variables that help businesses identify long-term trends and predict future outcomes and potential responses to a change.

For instance, if an IT company launches a new software product, the leading indicator can help effectively measure customer engagement and customer reviews and help predict the future outcome of the product.

4. Lagging KPIs

Lagging KPIs allow businesses to measure the current performance and compare it with past performance to track the progress.

Some common examples of lagging KPIs include quarterly profits, revenue growth, unemployment rate, and labor cost per unit of output.

5. Input KPIs

Input KPIs help track the resources necessary for a business to achieve the desired outcome. These indicators can help monitor how these essential resources are performing and how organizations are leveraging these resources for a campaign, project, or process.

6. Process KPIs

Process KPIs help track the efficiency of a new business process and identify potential changes and solutions to improve the effectiveness of its functioning.

7. Directional KPIs

Directional indicators allow the identification of the company’s overall performance and growth in comparison with competitors in the same industry. It also helps determine new trends in the industry.

8. Actionable KPIs

Actionable indicators measure a company’s ability to commit to change in business internally and externally. Common examples include tracking of company culture change, DEI initiatives, and employee sentiment.

How To Measure KPIs?

Step 1: Identify

Identify relevant KPIs to track for your business.

Step 2: Finalize

Narrow down the final list of KPIs to measure.

Step 3: Create

Create dashboards to measure and display KPIs.

Step 4: Craft

Craft a standard report to evaluate business performance and progress based on the KPIs.

Step 5: Evaluate

Share KPIs report with teams for quality checks and suggestions needed to improve performance.

Step 6: Change

Alter strategies and processes and set new goals and KPIs according to the results in the report.

Step 7: Assess

Assess whether the new strategy and KPIs align with the business goals and adjust if necessary.

Advantages & Limitations Of KPIs

Advantages Of KPIs Disadvantages Of KPIs
Help track the progress of project, product, process, and initiatives. They require a long time to provide significant data.
Help understand the business growth. Regular follow-up and tracking is essential.
Provides visibility on business performance and goals. If not used properly, they can lead to inaccurate results and conclusions.
Identifies the key problem areas. Costly and time-consuming for new business.
Helps in making informed and data-driven decisions. Too many KPIs can lead to information overload.
Predict future outcomes, risks of actions and provide possible improvement. Lack of standardization
Help stay updated and ahead of the competition. Pressure by KPIs can cause stress and dissatisfaction.

Industry KPI Examples

Below are some of the business models and key KPIs needed to focus on.

SaaS KPIs

  • Monthly recurring revenue (MRR)
  • Cost per acquisition (CPA)
  • Average revenue per retainer 
  • Churn rate 
  • Lifetime value (LTV)

Professional Service KPIs

  • Bookings
  • Effective billable rate
  • Revenue leakage
  • Backlog utilization

Online Media And Publishing KPIs

  • Unique visitors
  • Time on site
  • Page views
  • Share ratio
  • Social referral growth

Retail KPIs

  • Capital expenditure 
  • Sales per square foot
  • Customer satisfaction
  • Average customer spend 
  • Stock turnover

Sales And Financial KPIs

  • Monthly sales growth
  • Average purchase value
  • Monthly calls per rep
  • Opportunity to deal ratio
  • Earnings before interest, taxes, depreciation and amortization (EBITDA)
  • Net profit  
  • Gross profit 
  • Projected vs. actual revenue
  • Expenses vs. budget
  • Debt vs. equity ratio
  • Day sales outstanding (DSO) 
  • Regional or national sales
  • Sales from new customers
  • Repeat sales revenue
  • Deals closed
  • Total number of returns 
  • Online vs. in-store sales
  • Inventory turnover
  • Staff maintenance costs

Marketing KPIs

  • Return on Investment (ROI)
  • Lifetime value of a customer (LTV)
  • Customer acquisition cost (CAC)
  • Conversion rate
  • Number of visitors to the website 
  • Web and mobile traffic 
  • Click-through rate 
  • SEO rank
  • Lead generation rate 
  • Cost per lead 
  • Sales revenue from online marketing

Customer Relations KPIs

  • Lifetime value of a customer (LTV)
  • Customer acquisition cost (CAC)
  • Customer retention rate 
  • Customer satisfaction rate 
  • Customer support tickets
  • Total number of calls to customer service 
  • Total number of customer complaints

Service KPIs

  • Number of resolved tickets
  • Customer satisfaction score 
  • First response time
  • Net promoter score (NPS)

Website KPIs

  • Traffic
  • Traffic sources
  • Number of sessions
  • Number of transactions

Human Resources And Employment KPIs

  • The number of new hires
  • Cost per hire
  • The number of promotions
  • Employee turnover
  • Employee satisfaction via survey responses
  • Salary competitiveness ratio 
  • Retirement rate
  • Absenteeism rate  
  • Training and development cost

Employee Success KPIs

  • Personal target achievements such as sales quotas
  • Project completion within a required time frame
  • Productivity and speed of work
  • Customer satisfaction
  • Job satisfaction
  • Absenteeism

Impact Of KPIs In Business Valuation Process

Key performance indicators can be referred to as quantifiable measurement tools designed to provide real-time insights related to the financial, strategic, and operational performance of the business.

During the business valuation process, investors compare the business to the industry and its competitors using KPI reports. KPI reports provide better insights to investors about the risk profile of the business, efficiency, and profitability of the business operations, revenue drives, forecasts, and overall performance of the business.

By and large, KPIs have a huge impact on the business valuation of a company as they provide crucial data to understand the business that is being valued.

KPI Reports For Valuation

During the business valuation of a company, a key performance indicator report is required to present the business’s progress and performance. 

Below are three types of KPI report categories to consider:

1️⃣ Analytical KPI Report 

This report provides historical KPI data for comparison and explanation of what drives the results and growth.

2️⃣ Operational KPI Report

This report includes data related to daily business operations, which allows management to make informed and strategic decisions.

3️⃣ Strategic KPI Report 

This report states the overall financial and strategic health of the organization, a progress report to illustrate whether the business is achieving the desired goals.

To Conclude,

KPIs play an important role in the business valuation process. Frequent and accurate status reports about the business progress and performance helps both business and investors make informed decisions.

With KPIs reports, businesses can identify ways to improve the process while investors get a firm understanding of the financial standing of the business.

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