What Type of Information Can KPIs Provide?
Owning or running a business of any size requires a close relationship with the money you’re generating and spending. From start-ups to multi-million dollar corporations, tracking financial key performance indicators (KPIs) is crucial. What type of information can KPIs provide? They give you the data required to make sure your company can meet its goals.
For help organizing and analyzing your company’s financials, connect with the team at Fisher Bookkeeping. Our experts can provide bookkeeping support, clarity, and guidance for businesses of all sizes. Schedule a free call today, and let’s make sure you are on track to reach your goals.
Why Are KPIs Crucial to My Business?
Key performance indicators are tied to your company’s goals and are more than just charts of accounts. They are more than profit and loss statements. They are more than account balances.
A robust KPI is measurable and clear and points you toward your short-term and long-term objectives.
Without these precise milestone numbers, it’s nearly impossible to gauge whether or not you’re on course to meet your goals and expectations. CEOs and CFOs know that they must track their company’s financial vitals at regular intervals to keep moving in the right direction.
Businesses typically develop KPIs for all areas of their operations, including:
- Sales
- Financials
- Marketing
- Customer Retention
- Product Development
What Type of Information Can KPIs Provide About My Financials?
When looking at your corporate finances, there are dozens of KPIs you could consider, and they should all tie to your goals. Working with a bookkeeper during this process will help you choose KPIs that meet your needs and plans. Having an expert tracking these numbers also ensures that the data is quickly available to you throughout the year.
Your KPIs will give you information about things like your cash flow, revenue, and profit. But they also help track items like efficiency in accounting and HR. At Fisher Bookkeeping, we track profitability and lifetime revenue by client, along with retention ratios and more.
The data you receive from tracking your KPIs is vital to staying on course and righting the ship when necessary. This information helps you spot problems before they grow too big and lets you know how your company is doing compared to industry standards.
Your KPIs also help you share pertinent business information with your team without opening up all your finances to everyone. For instance, let’s say that your least profitable jobs perform at 30%. You can share this information and speak with individual contributors to sort out why that job is underperforming.
As with anything in running a business, the key performance indicators will overlap and impact one another. Having a clear KPI dashboard ensures you can see the crucial metrics quickly and easily.
Here are six essential financial key performance indicators for companies to monitor.
1. Gross Profit
This KPI is straightforward and crucial for business owners to know. It is simply the difference between what you sell something for and what it costs to produce it.
Frequently, entrepreneurs focus heavily on their revenue only. Of course, this number is crucial to your business success, and it is a perfect KPI for the sales and marketing teams. It is just one piece of the puzzle, however. Having a consistent and clear picture of your gross profit is critical to determining your company’s financial health.
If you’ve ever watched the show Shark Tank, you know that investors and lenders want to know more than just how much money is coming into the company. They require data on the gross profit you are generating.
Gross profit varies widely by industry. For example, construction companies have tremendous costs to cover and are likely to see gross profits as low as 15%. But a law firm could easily reach a metric of 80% gross profit. This KPI may also vary significantly based on what stage of business you are in.
After businesses pay all their expenses, they are looking at their net profit. A 10% net profit is a great metric for small businesses.
2. Net Profit Margin
Translating your bottom line profit into a percentage of your revenue is another essential KPI. By dividing the net profit by total revenue, this metric tells you how much of each dollar you earn is profit.
This key performance indicator is for your top-level leadership. They are the people who make decisions regarding overhead expenses and who have department heads reporting to them.
3. Operating Cash Flow
When you adjust your net profit for depreciation and other factors, you receive your operating cash flow (OCF). This financial vital sign gives you a picture of the cash inflow and outflow due to your company’s primary products or services. It does not look at investments or paying out dividends. The OCF is also called EBIDTA (“ee-bid-ta”), which stands for earnings before interest, taxes, depreciation, and amortization.
The OCF is a snapshot that tells you if your company can maintain its work without further capital. It is also necessary for determining if you can scale and grow with your current cash flow or if you need to seek additional funding.
4. Quick Ratio
Also called the acid test KPI, the quick ratio metric clarifies a company’s ability to cover its short-term liabilities right away. This key performance indicator divides current assets by current liabilities to display the cash on hand to meet immediate payables. A quick ratio under 1.0 is a concern for any bank and should be a concern for your leadership.
5. Burn Rate
Smaller companies, in particular, benefit from tracking this valuable KPI, which simply tracks the rate at which your business spends money. Typically, we express the burn rate as a monthly number, but you can choose to track it daily or weekly.
For companies that are operating solely on start-up funds, the burn rate is critical. It tells the leadership how many months they can continue before they must become profitable or get more funding. This number is frequently called the runway.
As an example, if a company has one million dollars in funding and spends $50,000 per month on operating expenses, they have a 20-month runway. If they begin generating some revenue, their burn rate slows, and their runway grows longer. However, when they grow their team, the runway shrinks due to the added personnel expenses.
6. Customer Acquisition Cost
Nearly all small businesses pay for some form of advertising, such as lead generation, SEO, and the staff to do these things. The key is finding out how well your advertising is working. Knowing how much it costs to gain a customer is complicated but vital for any business. It is especially important for product-based companies since they tend to have higher overhead costs.
To determine this financial KPI, you have to know the estimated lifetime revenue from a customer and how much you spend to gain a customer. By dividing the anticipated profit by the dollars spent, you get your customer acquisition ratio.
Ideally, your number is higher than one, meaning that for every dollar you spend to gain a customer, you make more than that back in revenue. For example, a ratio of 4 means that spending one dollar on acquisition brings in $4. A number less than one means that you are going in the hole with your advertising, and that is crucial to know.
Get Help from a Professional Team
Gauging, tracking, and analyzing all of your business financial data is a huge job. Bookkeeping is the perfect thing to outsource to ensure peace of mind and accurate information.
At Fisher Bookkeeping, our team of experts can support you no matter where you are in your business journey. We offer expertise and friendly service to keep your business on track and growing. Reach out today to schedule a call.
About the Author Barb Fisher
Barb is the CEO of Fisher Bookkeeping, an outsourced bookkeeping consultancy that provides small businesses with a full-service financial department. Her favorite aspect of work is to break down the accounting to meaningful bits, so entrepreneurs can make a powerful difference in their own business. She's also a power lifter (squat: 215, DL: 270).
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