Key Performance Indicators (KPIs) are a fundamental part of tracking progress. Financial KPIs allow business owners to assess their company’s progress. Its results enable business owners to build strategies that help achieve business goals, whether that’s 5 or 10 years down the road.
Unfortunately, the reality is that it’s very easy for small business owners to become buried in the day-to-day of their business to the point where they lose sight of where their business stands.
Before we dive into some of the most important financial KPIs that every small business owner should use to track progress, we need to first explain what financial KPIs are.
Using Financial KPI Measurements to Gain Better Business Insight
Much like how doctors use KPIs to measure health and wellbeing, KPIs are also used by businesses of all sizes.
According to Klipfolio, a Key Performance Indicator is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs at multiple levels to evaluate their success at reaching targets. High-level KPIs may focus on the overall performance of the business, while low-level KPIs may focus on processes in departments such as sales, marketing, HR, support and others.
In short, KPIs measure and extract data to demonstrate how well your business is performing.
It’s also important to note that looking at a single business KPI only tells a small part of the story of your business. In contrast, looking at a set of business KPIs tell a much bigger story. The ability to measure KPIs help you understand your business fully and maximize that knowledge to make informed, effective, and strategic decisions at low- and high-levels.
Business Areas to Apply Financial KPI Measurement
Small business owners should think carefully about which areas of their business are best suited for measurement. For example, your accountant can help you decide which KPIs are worth measuring, as well as which ones to leave behind. Several areas they can advise on include:
- Your business size and location
- The industry your business operates in
- Your short and long-term goals
- Where you are in your business life-cycle
- Any unique personal circumstances you have
Now that you understand what KPIs are and which areas of your business you can apply measurements to, here are the 4 key financial KPIs you should be tracking (if you aren’t already):
1. Gross Profit
The primary element of any successful business—large or small—is its profit. It is time to change the strategy of your business if you find yourself spending more on suppliers and netting less in sales from customers. Keeping track of this important KPI will tell you how much profit your business is generating as opposed to how much you are spending.
For example, if your business’s profit margin is increasing, then it is good practice to continue with that strategy. However, if at your next monthly check-in you see a decrease, then you likely need to reduce extra costs associated with your operations, such as wages, utilities or cost of goods sold (COGS).
How to do it: To calculate the profit margin of your business, simply multiply your gross profit by 100, then divide it with your sales.
In addition, you can measure this financial KPI by measuring your Profit & Loss (P&L). Your P&L records your business income and expenditures over a specific period and either shows a profit (income exceeding expenses) or a loss (where expenses exceed income).
2. Cash Flow (Flow In and Flow Out)
One of the most important financial KPIs for small businesses is cash flow. Identifying money flowing in and out helps business owners assess whether or not their sales and margins are appropriate, or are operating as expected.
Many small business owners who are starting out may neglect this aspect, as they operate without a full understanding of their financial picture.
How to do it: Build a cash flow forecast over a 12-month period. The first step is to estimate your weekly and monthly sales. Once you have an understanding of your sales history, you can then estimate your payment timings and their costs.
Not only does this help with tax preparation, but it can help you find areas of cash surpluses. For example, if purchasing a new office desk is on your radar, you can add the cost to your forecast. Adding this new statistic will tell you if purchasing this new office equipment will affect your cash flow (or not).
3. Outstanding Revenue
Being proactive and organized in your billing and collecting plays a significant role (and impact) on cash flow. Out of all the financial KPIs, knowing where your business stands in terms of outstanding revenue will affect your ability to pay bills.
Keeping proper bookkeeping records, taking the time to follow up on your receivables, and applying payments to your invoices will drastically help improve payment productivity and optimize quicker payment.
How to do it: Within Kashoo, you can improve this KPI by improving the payment process. Simply apply credit card payment to your invoices when sending them to customers. This will enable your customers to easily pay upon receiving the invoice, rather than leaving it for later.
4. Income By Customer
When first starting out, any customer under the sun is better no customer. However, as your business grows, a key financial KPI is to sort out the most valuable customers, as opposed to the bad ones.
Tracking income by customer will allow you to weed out which ones are the most important to your bottom line so that you can focus on nurturing those specific relationships and to make them more profitable.
How to do it: You can easily export this information in Kashoo by navigating to “Clients” under the “List” heading to the left column of your Dashboard. Kashoo’s software tracks it for you, making it very accessible to pull this sales data into Excel, Google Sheets or a CSV file.
Where Accounting Software Comes Into Play
Having an accounting software to track your spending and income makes it SO much easier to keep track of your small business financial KPIs. Kashoo offers several essential financial reports that let you see and export your data in a few clicks! Ready to give it a try? Sign up for a free 14-day trial!