Key Performance Indicators, or KPIs for short, are a type of performance measurement units that you can use in many ways to help your business grow.
For SMBs, keeping track of the finances is a sure way to determine if you’re on the right track, in terms of your success and sustainability.
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Once you’ve developed a business plan and set clear goals you want to achieve, the next step is managing your money via some of the important financial KPIs for your business. Managing your finances is essential if you ever plan to scale up in the future and don’t go bankrupt after a year.
What makes finances so interesting is that it can be applied to all people and all types of businesses – regardless of the size, industry, and so on. No matter what, the finance part always stays the same and can determine if you’re on the right trajectory as a business.
This is why it’s so important to keep track of your money. Often times, the data crunching and the many complicated numbers that show up in your records scare away a lot of people.
While it’s true that finance can be complicated – it’s also an essential skill you want to be on top of when running your business.
And if you want to continue operating your business and stay sustainable, it’s important you keep track of your finances.
There are many important financial key performance indicators and numbers you want to keep track of. So, grab a piece of paper and be ready to take notes.
Simply managing your finances well can make or break your business. But on the bright side, there is a lot of accounting software and online information to help you out when you’re just starting. And if you’re keeping track of your finances without an accountant – it’s essential you know where the money flows.
So, with that said, here’s a list of the important financial KPIs you might want to be keeping track of when running your business.
Follow the money and see where it leads.
1. Gross Profit Margin KPI
Money isn’t the most important thing in the world, but it’s often what everyone looks at in a business. Net worth, profitability, profit and costs are some of the many terms you might have heard of when talking about finances.
But if we’re going to be talking about money, it’s important we first discuss gross profit and what it means for your business.
Gross profit simply means the total revenue of your company, minus the cost of goods sold. And it’s a simple way to measure your profitability as a business.
Gross profit margin, meanwhile, tells you whether or not you’re pricing your goods or services appropriately. Here’s how you evaluate that:
Gross Profit Margin = (revenue – cost of goods sold)/revenue.
Unlike the gross profit KPI, the margin measures your company’s production efficiency over the years.
If there’s one KPI you’re going to keeping track of, make sure it’s the gross profit margin.
So, make sure your company is breathing well before you move on to the next steps.
2. Net Profit Margin KPI
This is another straightforward but important KPI that is important for your business’s health.
The net profit margin shows your business’s effectiveness by showing you how much profit you make for each dollar of sales you generate. It is calculated by the following:
Net profit margin = net profit / revenue.
If your company has a net profit margin of 50%, for example, this means you generate 50 cents of profit for each dollar of sales you make.
Net profit margin is important in that it shows your firm’s potential net worth based on your earnings. If you want to achieve a positive net profit at the end of the year, you should start with the net profit margin.
3. Revenue growth KPI
However, if you want to grow as a business and eventually scale up, your revenue (note: this is different from profit) is something you should always be tracking.
Revenue growth, as the name implies, is an increase in your company’s sales, usually compared to your previous quarters’ revenue performance. It helps you find out if you’re on the right track as a business in terms of financial growth. And if this is not the case, you need to gain a better understanding of your important financial numbers.
Calculating revenue growth is fairly simple, here’s how you do it:
- Track sales (and compile a report) of one particular financial period (quarterly, monthly, yearly) with your favorite software.
- Subtract the previous financial period’s revenue from the current one.
- And finally, divide that number by the last period’s total revenue.
If done well, you’ll get a percentage number as your revenue growth KPI and the higher the number is – the better.
If, for some reason, your business is in the red, this is something you need to figure it out ASAP.
The issue could lay with your customers, your product or something completely else. And if your revenue growth KPI is constantly negative – you might want to start saving money or risk going bankrupt.
4. Return on Investment (ROI) KPI
This is another simple KPI you probably have already heard of.
This performance indicator evaluates your efficiency in regards to the investment (or, the return on the investment. Simple, right?). Essentially it measures if your investment was worth it or not from a business standpoint.
ROI = (gain from investment – cost of investment) / cost of investment.
The gain from investment refers to the proceeds obtained from the sale of the investment of the interest.
That is to say, it measures if the efficiency on your investment was worth it in terms of the payoff. ROI is a simple way you can calculate if it’s worth to put money into a particular project.
5. Return on Equity (ROE) KPI
Similar to the above formula, but as the name implies, this indicator measures the return on the shareholders’ equity instead.
ROE is expressed as a percent and is calculated by the following:
Return on Equity = Net Income/Shareholder’s Equity
This formula is also known as return on net worth and compares your net income to the overall wealth of your business, for the size of your company. It essentially tells you how much profit your company generates with the money the shareholders have invested.
6. Income Sources KPI
This one’s obvious but still an important KPI you should be tracking.
Similarly to when you’re tracking your revenue, you should also be aware of your net income and where it’s coming from.
Your revenue can come in from many different streams and funnels, and you should be aware of each and every one of them.
It’s important you know which segments are profitable and worth pursuing – and which are not if you want to stay afloat. And the more you know about each business segment, the more likely you are to make better business decisions.
For example, if you’re still in the start-up phase, having a side hustle often provides an extra revenue stream in addition to your main streams. Depending on your business situation, you might want to continue pursuing it or drop it altogether if you have better income sources elsewhere.
7. Operating Cash Flow KPI
Operating activities are a part of your cash flow statement and indicate whether your company can generate enough cash flow to maintain or grow your operations.
This includes things like revenues (from sales, accounts receivable, refunds, etc.) and expenses (payments to employees and suppliers, fines, fees, etc.)
This is another important KPI as far as scaling up as a business goes. Ideally, you should know if your business is producing enough profit to match the investments you’re putting in your business.
You need to asses how well your business is doing and the operating cash flow is a great way to measure the health of your business.
Once you calculate your operating cash flow, you can then compare it to your total capital employed (that is to say, total capital used for profit acquisition) to see beyond just your profits.
8. Current Ratio KPI
This is a quick and simple liquidity ratio to determine whether your business has enough resources to meet its short-term obligations on time.
The current ratio is also known as the working capital ratio, and is also crucial for growth and scaling up. To find out your company’s current ratio, all you have to do is divide your current assets by your current liabilities.
If the ratio is under 1, this means your company’s liabilities are more than its assets – which can be a bad sign, depending on your industry. If this is the case, you’ll probably have trouble paying off your current obligations.
The higher the ratio – the more capable you are of paying off your obligations.
9. Working Capital KPI
Working capital, sometimes also called the net-working capital, is the difference between your company’s current assets (cash, accounts receivable, etc.) and your current liabilities (accounts payable, for example).
In short: this KPI measures your company’s efficiency and short-term financial health.
A good working capital ratio is anywhere between 1.2 and 2.0, while having less than 1.0 indicates negative working capital.
If your working capital is under 1.0, you might have potential liquidity problems. Meanwhile, if it’s over 2.0, you might not be using your excess assets effectively.
10. Revenue Per Employee KPI
This financial indicator measures your company’s total revenue per the number of your current employees. It basically tells you how much money is generated from each employee.
The formula for this indicator is simple and is calculated by the following:
Revenue Per Employee = Revenue/# of employees.
This ratio is a great way to tell how well you’re doing compared to your competitors in the same industry or to see the change in your company’s figures over the years.
Ideally, a company wants the highest efficiency possible. In this case, this means the highest revenue possible per employee. So, with the above formula, you can measure the productivity and efficiency of each employee.
Of course, it’s not always a numbers game and just because an employee isn’t generating as much revenue as possible – doesn’t mean they’re not useful.
However, if you’re seeking to maximize efficiency and want to see how well you’re using your human capital – the indicator can tell you a lot about your firm.
11. Days Sales Outstanding (DSO) KPI
This indicator is important for any business as it tells you the average number of days it requires for a client to pay your company, from receiving the invoice until the final payment.
DSO is often determined on a weekly, monthly, or a quarterly basis. And the smaller your number is – the better your cash flow.
Ideally, you should be tracking your expenses as well, along with your invoices.
You can then use that to reinvest into the company. If the number is less than 133% of the agreed payment date, you’re on the right track.
For example, if your invoice due date was 30 days, the DSO has to be 40 days or less. If it’s more than that, you should seek ways to decrease invoice payment times.
Putting the Knowledge to Work
All in all, there are more financial KPIs out there, but you may even end up using less. A lot depends on your needs and requirements.
So, it’s important to set clear SMART (specific, measurable, attainable, relevant, timely) goals first. Depending on your goals, you can then track as many KPIs as needed. There is no need to be tracking everything if it doesn’t benefit your company.
This is why it’s hard to generalize financial KPIs – each of them has a different intent.
So, for example, if you’re seeking to save money, you might want to be keeping track of financial savings KPI. But if you’re seeking to grow as a business and see how well you’re doing in terms of data – revenue growth might be the KPI for you.
With that said, accounting is a complex and a tough world to get into. If you’re not sure what you’re doing, consider adopting an accounting software to boost your business and get rid of manual bookkeeping.
If it’s the terms you’re not sure about and need to Google every other term you come across, you can check out the InvoiceBerry accounting dictionary for a list of all the helpful accounting terms.
Keeping track of your finances is a vital step as a business owner, especially if you’re just starting out. So, be sure to utilize as many resources and information you need to help you get started.