Role of Different KPIs for Valuation of a Business
Performance indicators of a business (KPIs) serve as tools to measure a company’s long-term performance. These indicators help assess your business in terms of its operational, strategic, and financial health and compare it with others in the industry. However, before you get started with the valuation, you should know what these KPIs cover to get a better idea.
- Financial KPIs: For projecting financials the right way, different KPIs are used, focusing on measuring profits and revenues. The most common is net profit measurement that calculates profit by subtracting all expenses from revenue. The gross profit margin KPI takes into account expenses related to purchasable products for profit calculation. Similarly, monetary KPI refers to the ratio of assets to debts. A financially healthy company should have enough cash to keep the business afloat for around 12 months.
- Customer-centric KPIs: This covers the customer lifecycle value calculation by considering efficiency, satisfaction, and retention per customer. It calculates how much a customer is willing to spend throughout the relationship with the business. Customer acquisition cost involves calculating the net cost a business has to spend to onboard a new customer.
- Process Performance KPIs: This section covers the operational performance of a business. For instance, it measures the percentage of accuracy through the ratio of successful to failed results. The goal is to improve this percentage and bring the ratio as close to one as possible. In other ways, it can also measure defective products versus total products, targeting bringing the number down.
A business valuation expert can help you predict the best value for your business accurately based on all such metrics.