It’s the new year, and you have set some new or revised goals for your business. Excellent! Now what? How do I know if I am headed in the right direction? What information will help me course correct or tell me I am on the right path? Key Performance Indicators, or KPI’s, will have the answers to your goal-related questions. As a bonus, they can answer most financial related questions you have about your business.
Learning which KPI’s best answer your business questions is a learning curve. What is essential to one business may not be as crucial to another. It comes down to what you are trying to accomplish; Grow your business? Are you saving for a downturn in the economy? Are you applying for an SBA loan? All these things will factor in which you choose to track.
What is a KPI?
According to kpi.org/KPI-Basics, “Key Performance Indicators (KPIs) are the critical (key) indicators of progress toward an intended result. KPIs provide a focus for strategic and operational improvement, create an analytical basis for decision making, and help focus attention on what matters most.”
A KPI is most often in the form of some type of graph or chart. It should be able to compare and contrast from many different date ranges. Most importantly, it should stay up to date. Always up to date. Old information is useless information.
Reach Reporting regularly syncs your data with your QuickBooks account. As long as QB is up to date, Reach Reporting is up to date.
Where and how do I see my KPIs?
Well, I am so glad you asked! Here at Reach Reporting, we believe we have created the industry-leading financial reporting software. Our dashboards and financial reports are pretty much the coolest things ever. We have jam-packed it with KPI’s and metrics you didn’t know you needed in your life. You can create your custom dashboard for your business full of precisely the up to date information you want and need to reach your goals.
Let’s go over a few of the most common and most informational KPI’s. It’s an excellent place to start, and from there you can add and subtract when you learn which provide you with the information you are looking to find.
Cash flow is the money that is moving (or flowing) both in and out of your business.
The cash coming into your business is from customers or clients who are buying your products or services. Often customers don’t pay at the time of purchase; this means some of your cash flow is coming from collections of accounts receivable. The cash headed out of your business is payments for expenses, for example, rent or a mortgage, in monthly loan payments, and in payments for taxes and other accounts payable.
Tracking Cash Flow is vital to the success of any business in any industry. The lack of cash is one of the biggest reasons small businesses fail. That’s why it is crucial to understand. Plain and Simple. According to the Small Business Administration says, “Inadequate cash reserves” are a top reason startups don’t succeed.
Gross Profit Margin
Gross profit margin is a ratio used to measure a company’s financial health by revealing the amount of money left over from sales after deducting the cost of goods sold. It can be calculated by subtracting the cost of goods sold (COGS) from total revenue and then dividing that number by total revenue.
Gross profit margin is the starting point toward achieving a healthy net profit. It is an indication of the financial success and viability of a particular product or service within a company. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations.
The figure is commonly used as a primary means of measuring your business profit. It is also a useful tool to plan the future operations of a company.
Customer Lifetime Value (CLV)
Customer lifetime value (CLV) is how to gauge the total revenue a business can honestly expect from a single customer account. It compares the customer’s revenue value to the company’s predicted customer lifespan. Businesses use this metric to identify vital customer segments that are the most valuable to the company.
CLV is a critical metric due to the common knowledge that keeping a current customer is drastically less expensive than acquiring a new one. In turn, increasing the value of existing customers is an excellent way to boost growth. You can also use this information to learn which of your clients are your most profitable.
In its most simple form one can calculate CLV this way;
Customer revenue minus the costs of acquiring and serving the customer = CLV
Rare is the day things are that simple, but with this information, you can grow your company without the costs of new customers.
Think of working capital as the money your company has day to day to cover costs. It shows the overall health of your company because it includes (but not limited to) accounts payable, accounts receivable, cash, and inventory.
To calculate working capital (WC), just sign up for Reach Reporting, and we will take care of the rest. If you are just dying to do all the math yourself here is the formula 🙂
Working capital ratio = current assets / current liabilities
Banks, other financial institutions, and investors will look at a company’s working capital to help determine whether a company is a good investment. This is why it made the list of crucial KPIs to watch and learn.
Final Thoughts on KPIs
As Peter Drucker famously said, “What gets measured gets done.” This quote especially applies to the goals you have set. Business or personal, doesn’t matter. If you are unable to track your success or failures, your chances of accomplishing what you desire head south in a hurry. Looking back at your goals, maybe they need to be tweaked just a hair or two, to be measurable. Check out this article; it has some great tips on setting SMART goals for your company.
These KPIs are a starting point for tracking your financials. Start here, and as you learn and grow and gain experience, you will discover which ones fit your situation the best.