Can KPI reporting really make a difference for your business next year?
With the new year upon us, every business needs to get ready to tackle it full on. 2020 has been full of surprises, to say the least. This year quite simply made every single business on the planet re-think what matters and put an emphasis on being able to stay in business. To avoid difficult situations (such as debt, loss of customers, etc.) they won’t be able to recover.
In short, every business owner, in particular, small businesses knows what they don’t want. And that’s a good thing. However, if you want to make progress and not avoid going out of business you need to have concrete goals you want to achieve.
Since knowing if you are actually improving can be complex, you’ll need a system or structure that allows you to measure how much success you’re having. This is where you start using KPIs.
This article looks at 5 financial areas where you can implement and track KPIs to make sure your business is moving in the right direction.
KPI Reporting and Why It Matters For Your Business
Peter Drucker, a famous management consultant, is quoted as saying “If you can’t measure it, you can’t improve it.” And that’s the most succinct way of thinking about why having financial KPIs is important for your business. Every business wants to improve and using measurable indicators is the best way to know how your strategic decisions are making an impact.
Unlike other areas in your business that can be more subjective in nature, financial KPIs are usually easy to measure. The complexity can come from making sure that you are focusing on the KPIs that matter the most for your business. This way you can avoid analysis paralysis and see how your business decisions make an impact on your chosen metrics to track.
Cash Flow Metrics To Keep Track
If there is only one financial KPI you’re planning to track, it should be cash flow. The reason for this is that cash flow is the de facto indicator of the overall health of a business. Much more so for smaller businesses since they are much more dependent on cash flow to run their day-to-day operations.
There are several ways to measure cash flow, here are two for you to consider:
- Free Cash Flow: This KPI refers to the amount of cash you have left after your capital expenditures. Capital expenditures (CapEx) are the funds companies use to buy, maintain and upgrade physical assets such as property, technology and equipment. So the cash left over is what is available for a business to reinvest in growth or expansion.
- Cash Flow from Operations: This is the amount of cash you have available that comes directly from your businesses’ main activity(sales of your products/services) and not some other source of funding. This metric is a practical way of measuring business performance since it is directly related to the operation.
Payroll And People Financial KPIs
People and their know-how are what drives the vast majority of businesses. Quite simply, without people, most businesses can’t operate, let alone grow. Because of this, being able to accurately measure KPIs directly related to your people is a practical way to understand your ability to grow or what your biggest risks to avoid are. These are a couple of payroll metrics that you can use to measure the health of your employees.
- Revenue per employee: This metric gives you an average of how much each employee contributes to your overall revenue. It is important to understand that more revenue per employee isn’t always better. It could also mean that everybody is working too much and you need to hire more employees.
- Contribution margin per employee: This metric is similar to revenue per employee, but instead of total revenue, it focuses on margin. Combined, these two metrics give you a clear picture of what the performance of your payroll is.
Cost/Profitability Metrics
The goal of every healthy business is to make a profit. And for this reason, keeping track of your costs and your resulting profitability are such useful indicators to know if the needle is moving in the right direction.
- Net income: Also known as “The Bottom Line”, net income is the metric that lets you know if your total equity is increasing or decreasing. Said differently, this is the KPI that directly measures your business’s growth or contraction.
- Gross Profit %: Gross profit is a relative indicator that lets you know how efficiently you are running your business. Since it is expressed as a percentage, it can give you a clear indicator without the distraction of varying numbers that may not be indicative of your actual financial performance. In short, it lets you know how much of the money you are making, you are actually keeping.
Forecast And Budget Metrics
It’s very likely that you spent a significant amount of time working on putting together an annual budget. So it only makes sense to keep track of how well your budget is holding up. This is where these next couple of metrics become useful tools to determine if everything is going to plan or if some adjustments may be necessary to get through the fiscal year.
- Burn rate: This KPI keeps track of how quickly you are going through your cash relative to your budget. If this is too high, then it signals that you may run out of cash too soon. If it’s too low, it indicates that you could be doing more and you probably won’t reach your growth objectives.
- Working capital: This metric gives you a clear perspective on how much funds you have available to cover your working expenses. These funds can come from credits, cash and accounts receivable.
Startup Metrics
If your business is a startup or in its early stages, you probably ask yourself frequently “are we going to make it?”. The good news is that there are several KPIs that can help you and everyone else have the certainty that everything is moving in the right direction.
- Runway: Runway is one of the most critical KPIs for every startup since it literally measures how much time you have left to make a profit and become a sustainable business.
- Customer Acquisition Cost (CAC): This metric is one of the biggest unknowns for every startup since you don’t have any historical data to rely on. The CAC measures how much you have to spend in order to gain a new customer. Once you know this amount you can work on lowering it and also forecast your growth.
KPI Reporting and Your Business
There are many different ways to gauge if your business is moving in the right direction. So when 2021 comes along you’ll be better prepared for whatever the new year has in store, both good and bad. To help, consider outsourcing your accounting and potentially seeking the experience of a fractional CFO service.
As a final takeaway, keep in mind that it probably doesn’t make sense to use every KPI out there. Instead, pick a handful that you can track easily and monitor them periodically so you can act upon them in a timely manner.