Congratulations on the article, “ Help Clients Take Measure ” ( JofA, Jun.02, page 53). CPAs are in an ideal situation to help clients through the performance measurement process.
I believe it is necessary to stress the most critical component of a performance measurement engagement—the resulting financial impact of measuring and monitoring key performance indicators (KPIs).
Often successful business owners intuitively know what needs to be monitored but lack the technical skills to identify the cause-and-effect relationship between KPIs and the resulting financial outcome. The business owner may know what to monitor, but not what the targeted outcome should be to achieve his or her desired financial and strategic goals.
For example, assume a mail-order-catalog company selects “same-day shipping” to give it a competitive advantage. The company will need more inventory to satisfy the same-day-shipping requirement. Inevitably, some form of an inventory turnover measurement becomes appropriate (inventory turnover rate, number of back orders per sales order, for example). In this case, what is the effect on cash flow and related borrowing costs if the monthly inventory turnover rate is nine vs. seven times? Conversely, what is the estimated loss of market share if the turnover rate is seven vs. nine times?
A CPA provides value to a client not only by identifying KPIs, but also by clarifying the financial and strategic results for those KPIs to specifically help the business achieve its long-term goals.
Eric G. Bowers, CPA
Colorado Springs, Colorado
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