One of the most critical activities in starting or running activities is quantifying your business’s performance. You have worked hard, bringing your heart and soul to your business. There were late nights, weekends, and the days in between. Whether you are a one-person business or managing multiple staff, you handle IT, customer service, sales, and marketing. You name them all. Yet, how do you know whether your business is doing well? Here is where the quantifying part comes in. This post will look at how we can use 5 financial key performance indicators (KPIs) to measure your business results.

1)What Is A Business KPI?

     Klipfolio defines that “A Key Performance Indicator is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs at multiple levels to evaluate their success at reaching targets.” 

     In finance, KPIs help us to identify our business issues and whether we achieve the financial object ives. It can be your cash flow position. It can be your return on investment. You can choose how often you measure your financial indicators – weekly, monthly, quarterly and annually. I suggest that you do at least one time per quarter. You are booking time in your calendar, making yourself a cup of coffee, and dive in on your hard data.

     You can create your indicator – it can be how efficient you are using your time or anything important to your business. Here I suggest a couple of key performance indicators relating to your business financial performance.

2) Gross Profit

     Gross profit is the results your business achieves after deducting the sale from the cost of making products. The cost can be your labor hours and staff working directly on the client engagement labors for a service-based business. The formula to get the gross profit is below:

      Gross Profit = Revenue – Cost of Good Sold (COGS)

     This ratio is probably one of the most critical indicators because your business can face a massive battle without making a profit on your sales. Of course, for the first couple of years, making a break-even can be an indicator.

     If you use the gross profit and divide it by the revenue, you have the gross profit margin. You can use the gross profit margin to compare with your industry’s gross profit margin to see how your business performs.

     You also can calculate the gross profit for each product line. By doing this, you can see how each product performs and contribute to your over business profit. You may find some products that require a lot of your company resources, but the gross profit is slim. The slim in profit is where you investigate the reasons and think about the product strategies.

3) Cash Flow

     The operating cash flow statement is an essential indicator of your business’s financial health. For many companies, you can make a profit on the Profit and Loss Statement, but you do not have money or cash to pay for any expenses. And, this is one of the challenges many businesses faced in 2020. Cash keeps your business afloat and survives critical time. Without having cash on your hands, your business faces a considerable challenge; even your company has a lot of demand in sales.

     Cash flow projection can be calculated as below:

Beginning cash

+Cash inflow

-Cash outflow

= Ending cash.

      Cash inflow can be sales, collectible receivable. Cash outflow can be upcoming bills – rents, utilities, interest payments.

4) Efficiency Ratios

      The efficiency ratios help to measure how well a business utilizes its assets and resources to generate revenue. There are a couple of efficiency ratios as below:

Account receivable turnover =Net credit sales/ average account receivable.

     This ratio is to measure efficiency in which how your business efficient in collecting payments. Doing this is where you can change your strategy – giving a discount to order faster—changing the due terms on your invoices.

      -If you are in the service industry, you can use the staff’s labor or time labors to measure efficiency. 

     The results will help determine whether you should hire lower entry staff or outsource to take care of the works that do not need work time. You can also simplify the process and using more automation and software to help you increase efficiency.

5) Revenue Growth Rate:

      Revenue growth rate helps you see the progression of your sales. This can be calculated as below:

Revenue growth rate = ((Current period – previous period)/Previous period )) * 100

      Revenue growth rate provides insight how your sales has been performing through the periods. A negative growth rate can signal a trouble that require attention. You can dig in to explore what were the reasons causing the growth rate negative. You can calculate growth rate over any period, from product launches to launches, weekly, monthly. 

6) Net Profit Margin Ratio

     The net profit remains part of your revenue after deducting all of the cost of good sold and operating expenses, interest, and tax. This shows how successful you manage your operating cost and reserve your profit.

Net profit margin = (Revenue – ( COGS +Operating expenses+ Interest+ tax))/ revenue.

     This ratio shows you how much profit your business earns from each dollar in sales. For example, a 5% profit margin means that your make 5 cents for each dollar revenue you sold.

      When your net profit margin is negative, it can indicate that you have a couple of issues in your operation. It may be a high operating expense; It can be the pricing strategy that does not cover its cost. It can be the employee theft problem. Making sure you review your operation and process to identify the real issues causing the negative ratios.

Conclusion

Okay, that is it! The financial KPI gives me all the energy and attention as I can spend all day talking about more calculations, more analysis. This is where you find that the numbers will help you quantify your business strategy and growth. BUT I’ll end it here with these 5 KPIs because they should give you a good start on analyzing your business results. I love the fact that I have spent a lot of time helping many business owners see through their business results, causes and develop strategies for them. I can tell you that these are such powerful tools, and you do not need to do all of them at first; pick what related to your business. You’ll develop more along the way. YET, schedule that in your calendar the time to start analyzes your number! Without scheduling it, nothing will be done.