Many small business owners are often caught up with the day-to-day operations of their businesses, the quest to break-even, as well as the pursuance of grand strategic goals. However, such big pictures are defined by basic units of performance that can be tracked and improved on a day-to-day basis.
The performance of a business can be measured across different metrics to determine what is working or not working both operationally and strategically. One of the best ways to assess whether or not these growths are being attained periodically is to use what is known as “Key Performance Indicator (KPI).”
When it comes to tracking the performance of a business, there are some financial KPIs to keep an eye on. These KPIs can both inform the short and long term strategies of a business by measuring it in the here and now as well as presenting and positioning a business for opportunities and the big picture.
It serves as an important tool in measuring business performance as it helps ascertain if a business is on track towards achieving its financial and non-financial goals. Also, assessing the success of existing strategy based on specified metrics, elucidate areas within the business operations and management that need improvement, assessing customer experience, and identifying critical success factors, opportunities and challenges.
Financial KPIs will vary from business-to-business, depending on your goals. However, here are five of the most important and most common ones that you must track to ensure that your company is on the right course.
Revenue Growth
One of the first financial metrics that determine whether you are making money or not is assessing your revenue growth. How has your revenue increased (or decreased) over the past months, weeks, or years? The goal is to aim for positive growth by coming up with strategies periodically to ensure that everything is on course.
In the same vein, negative growth often reveals that something is wrong and there is a need for the business to take corrective action. Such results could be indicative of the fact that customers are not interested in buying the products/services or that there needs to be an improvement in client acquisition.
Debt Ratio
Where a business leverages debt in financing its activities, this too must be tracked and assessed periodically. On the one hand, you want to ensure that the loans collected are being used for the reasons they were intended and not anything else.
You also want to be in the constant know to ensure that debt levels are not rising to worrisome heights and that the company is doing all it can to optimise these loans for the overall growth of the business. Debt ratio can be calculated by dividing total debt by your total assets.
Profitability (Gross and Net)
By tracking both the expenses and income of the business, one can compile profit and loss reports, (through deducting expenses from income) to analyse business performance over a period. While the gross profit margin will show the top line or direct cost items as well as the direct profit being made.
The net profit will offer sound insight into whether or not the company is still profitable after overhead expenses like rent and salaries have been taken out. This will provide insight for vital decision making such as the need to cut cost and specific area to do so, the need to raise prices to increase net profit margins or the need to source for more or better clients.
Cash Balance
While growing revenue is great, the revenue line item is not enough determinant as to whether or not your company is making the required cash to keep the business afloat. This is because a lot of times, revenue is recorded on credit; hence, it might be tough to determine the company’s cash balance from there. This is, however, where the cashflow statement comes in handy.
A simple way to calculate the cash balance is to show the received minus the cash paid out during the period under review. A low balance may mean that the company does not have enough cash to meet its operational requirements while a high cash balance may mean that the company isn’t using its resources optimally as cash is just sitting down.
Working Capital
Following closely from having a sound cash balance is the need to keep working capital fluid throughout the business. A key part of business management involves planning ahead so that a business is better prepared and positioned to take advantage of future opportunities. One of the worse positions a business can be in is to see a dream client or opportunity come knocking and it is unable to take advantage of the opportunity for lack of sufficient cash to invest in such propositions.
Beyond cash, it is important to review both the other current assets of the business such as short-term debtors as well as the current liabilities of the business such as bank overdrafts and short-term creditors. Working capital is calculated by dividing current assets by current liabilities.