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As a business owner, you have no shortage of tasks and responsibilities vying for your attention, so it's critical you know which small business KPIs (key performance indicators) are the most impactful. The right small business KPIs will help you determine if you're dedicating too much time, effort, and money on something that doesn't offer the payoff you desire. Let's take a look at a few of the most important and impactful small business KPIs you should pay special attention to.
If you sell a product or keep an inventory, it's critical for you to understand the number of times the inventory is used or sold within a certain period of time, which is the inventory turnover. This small business KPI is extremely helpful because it unveils your ability to move goods. Best of all, this small business KPI is relatively easy to calculate. Simply add up the cost of inventory sold, then divide this total by the value of the remaining inventory at the end of the year.
Any small business owner would pursue a high turnover rate. However, you shouldn't try to achieve a high turnover rate by reducing the prices of your product too significantly. Using this small business KPI can allow you to measure and plan for inventory adjustments as required.
The cash flow forecast allows you to determine whether your margins and sales are appropriate. In fact, cash flow forecasts are among the most important small business KPIs you should track. To calculate cash flow forecast, add the amount of cash your business has in savings to your projected cash value for the next four weeks. Then, you should subtract the projected cash out for the next four weeks.
The savviest business owners regularly perform cash flow forecasts to quickly identify problems as early as possible. Once problems are identified, this small business KPI will empower you to make the required adjustments. Cash flow forecasting is critical for upcoming loan applications, crucial tax planning, and helping your business anticipate any shortages or surpluses.
The debt ratio for your business can be calculated by dividing your total debt by your total assets. This calculation will demonstrate how "leveraged" your business is. In most instances, it's important to keep your debt ratio low; but if you must take on debt, it's helpful to be smart about the types of debt you take on to grow your business.
Your debt ratio will be critical in helping determine the credit worthiness of your business as well as its long term sustainability. You'll want to check your ratios against industry benchmarks to have a solid understanding of your financial risk.
If your business is paying out more than it is taking in, success and profitability are both virtually impossible. One way you can keep a close eye on this ebb and flow is with the gross profit margin as a profit of sales KPI, which is an expression of total profits compared to your revenue.
To compute this small business KPI, you must first calculate your gross profit margin (GPM) by dividing your company's gross profit by sales. Multiply this number by 100, which will deliver your gross profit margin in a percentage. The next step is to determine how much of your gross profit margin makes up your overall sales, which involves dividing this value by your sales amount. Use this equation:
(Gross Profit/Sales x 100) / Sales
When you track this KPI over time, you'll be empowered to easily know how much money you're keeping vs the amount you're paying out to suppliers. Simply put, when you retain funds, the company's GPM will increase. However, whenever your business experiences a decrease in GPM as a percentage of sales, it often indicates you're overspending on supplies. If this is the case, you may consider either increasing the prices of your services and goods or reducing your overhead costs.
It may be relatively obvious revenue growth rate refers to the manner in which your sales growth or company's income increases. To calculate your revenue growth rate, start with your company's total revenue for the year. Once you have this, divide the revenue by last year's revenue to determine growth rate.
By having a rolling revenue growth rate calculation, you'll be able to assess whether your growth is decreasing, increasing, or plateauing. Then you can use this small business KPI to make any required changes to ensure your business remains profitable.
When it comes to calculating small business KPIs, you're not alone. The experts at John F. Dennehy CPA specialize in offering a broad range of accounting solutions, including offering rolling key performance indicators. By partnering with John F. Dennehy, we'll make sure you have access to the best insights, so you can make better business decisions.
Contact us today to learn how we can help you achieve your business goals.