Key performance indicators (KPIs) are a critical aspect of any business. These help you determine your company’s performance based on preset goals. You can then assess the effectiveness of your current strategies and reevaluate whether you should change them.
While KPIs are vital, many small business owners don’t value or utilize them. This issue makes it difficult to compete with established brands and sustain desired growth. Failure to track KPIs can also lead to resource wastage and avoidable losses.
Are you wondering about the financial KPIs you should monitor? Read on to discover the metrics to look out for and how to improve them.
The gross profit margin allows you to determine returns on each sale. Calculate this KPI by assessing the revenue generated from sales over a given period.
After that, deduct the expense you incurred buying the goods or supplying them to customers. You may then convert the value to a percentage by dividing it by the previous gross profit and multiplying by 100. {Gross Profit Margin = ([Sales Revenue – The cost of sold goods] / Sales Revenue) x 100)}
Calculating your gross profit margin has several benefits. First, you can determine if your marketing methods are effective. Besides, you can quickly measure the company’s growth by comparing the current profit with the previous period’s.
Another benefit of measuring gross profit margin is comparing costs to the benefits. Using this KPI, you will assess if the cost of sourcing goods or offering services is high. You may then implement strategies to reduce the expenses and boost profits. Alternatively, increase prices for premium products to offset the high cost of goods sold.
Tracking revenue changes can help you assess if your business is growing. Further, this KPI will allow you to compare your company’s performance to that of competitors. You may then determine if you optimize business trends and the demand for your products or services.
More benefits of tracking revenue growth are:
Your small business’s revenue may vary due to your customers’ spending habits. It may also differ due to seasons and economic performance.
Tracking your revenue growth allows you to manage cash flow throughout a financial year. For example, you can identify the best periods to invest in certain ventures. Besides, you can evaluate the best periods to offer discounts and expand your customer base. Tracking the KPI also makes it easier to identify when to outsource capital or repay debts.
The formula to calculate Revenue growth = (Current Revenue – Prior Revenue) / Prior Revenue
Many small business owners use credit to grow their enterprises. Others rely on venture capitalists to fund operations and establish their startups.
Calculating your debt to net worth ratio allows you to assess the equity you have in your business. A formula you can use is: Total Liabilities / Net Worth or Stockholders’ Equity.
A healthy business should have a low debt to net worth ratio. This means that your equity must be greater than the debt, or the equity venture capitalists have in your brand.
If you discover that your brand has a high debt to net worth ratio, consider using other methods to source capital. For example, sell unpaid invoices on an online marketplace, like our Global Receivables Marketplace. This step will allow you to avoid excessive credit. Besides, you can cover expenses and avoid liquidation in the long run.
The operating profit margin allows you to assess the money left after eliminating costs. This KPI is a proportion of the net sales revenue calculated as follows: Operating Profit Margin = Operating Profit / Sales Revenue
Tracking your operating profit margin will help assess if you use efficient methods to run your business. You may also identify high expenses and strategize how to lower them without affecting the quality of services or products.
More benefits of monitoring the operating profit margin in your small business are:
While business sales often vary, significant differences could indicate a problem. Track sales growth to identify your company’s revenue changes over a given period.
The formula to calculate this KPI is = (Sales from the current period – Sales from the past period) / Sales from the last period x 100
Monitoring sales growth is the ultimate way to assess if your marketing methods are effective. Besides, you can use the KPI to determine if the growth strategies used in a particular period are effective. Another reason to track sales growth is it allows you to develop ways to boost return on investments.
While customer retention reflects your marketing team’s efforts, it can also affect your finances. Tracking the retention rates will help assess if your customers are happy. You can also gauge the effects of client satisfaction on the churn rate.
The formula to calculate customer retention rate is: The number of new customers at the end of a given period/ The total number of customers at the beginning of the period x 100
A high customer retention rate implies that you offer high-quality services or products. It also shows that you address clients’ demands and meet their evolving needs. On the other hand, a low retention rate may indicate that you don’t fully understand the needs of your target market. Further, it shows that you don’t have effective strategies to avoid churn.
Boosting your financial KPIs without enough capital can be challenging. At Crowdz, we help you improve business performance while avoiding debt.
Our Crowdz Global Receivables Marketplace will connect you with investors who buy receivables. The buyers will then provide upfront capital you can use to fund operations and boost your KPIs. Contact us now to improve cash flow in your small business.