Understanding KPIs: A guide for small businesses 

When running a small business, it’s easy to get caught up in the day-to-day operations and lose sight of the bigger financial picture.  

Most businesses keep an eye on sales and expenses, but many need to dig deeper to truly understand their financial health. 

That’s where Key Performance Indicators (KPIs) come into play.  

These specific metrics can provide invaluable insights into your company’s financial well-being and guide your decision-making process. 

What exactly are KPIs? 

In the simplest terms, KPIs are metrics that help you measure the success of various aspects of your business.  

Financial KPIs focus on data points that reveal how well you’re doing in monetary terms.  

They range from straightforward measures like revenue to more complex metrics like Customer Acquisition Cost (CAC) and Customer Lifetime Value (CLV). 

You can tailor the KPIs you track based on the type of business you are running, and which ones are the most relevant to your specific financial situation. 

The must-know financial KPIs 

There are a few KPIs that every business owner should keep on top of. 

  • Gross profit margin: This tells you what percentage of your sales is profit, after accounting for the cost of goods sold (COGS). A low margin might suggest that you’re under-pricing your products or services, or that costs need to be better managed. 
  • Operating profit margin: This metric provides a more nuanced look at profitability by considering not just COGS, but also other operating expenses like salaries, rent, and utilities. A declining operating profit margin could be a red flag for increasing overheads. 
  • Current ratio: This measures your ability to cover short-term liabilities with short-term assets. A ratio below 1 could signal liquidity problems, potentially making it difficult to cover upcoming expenses or take advantage of new opportunities. 
  • Quick ratio: Also known as the acid-test ratio, this metric measures your ability to meet short-term liabilities using only your most liquid assets like cash and accounts receivable. If this ratio is low, you might struggle to quickly convert assets to cash, indicating a potential liquidity issue. 
  • Accounts receivable turnover: This indicates how efficiently you’re collecting payments. A lower ratio might mean it’s time to review your credit policies or ramp up collection efforts to improve cash flow. 
  • Debt to equity ratio: This helps you understand your company’s leverage by comparing total debt to shareholders’ equity. A high ratio might indicate excessive borrowing, which could put your business at risk, particularly if interest rates rise. 
  • Return on investment (ROI): This KPI evaluates the profitability of different investments within your business. By calculating ROI, you can focus on the most profitable areas and consider reallocating resources. 
  • Inventory turnover: Understanding how often you sell and replace inventory can help manage stock levels more effectively. A lower turnover might indicate overstocking, which can result in increased costs, while a higher turnover suggests strong sales. 

How to start tracking these KPIs 

If you’re new to KPI tracking, the first step is setting up a robust system to collect and analyse data.  

This could be as simple as a dedicated spreadsheet, or as sophisticated as accounting software that automates the process.  

An experienced accountant can help you develop a strategy for this.  

Once you’re up and running, the key is regular monitoring and review.  

This not only helps you identify trends but also allows you to make informed decisions that can improve your bottom line. 

The bigger financial picture 

It’s crucial to remember that while KPIs provide essential insights into your financial health, they are not the be-all and end-all.  

They should be considered as part of a broader financial analysis and used alongside other types of business reviews and market research.  

By keeping tabs on these financial KPIs, you’re not just collecting data – you’re gaining actionable insights that can guide strategic decision-making and ultimately fuel your business growth.  

Remember, an accountant can simplify KPIs and help you start tracking and monitoring them – increasing your chances of financial success. 

It might require a little extra effort and cash now, but the long-term benefits of engaging an accountant could be significant.  

After all, knowledge is power and with an experienced financial professional to help you, you’re well on your way to business success. 

Talk to our experts about monitoring your KPIs today.  

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