What is meant by KPIs and how will they help my small business?

KPIs are an important factor in monitoring the achievements of your business. Keeping track of how you are performing will help to keep your operations on track and to achieve the success you want.  

There are lots of KPIs you can measure and they can be financial and non-financial. The most relevant for you, will depend on your type of business, your customers and what products or services you are selling.  

It will be tricky and potentially a waste of time to track every possible KPI, so think about the best ones for your circumstances.  

Consider your business goals and objectives. Examples include improving sales revenue, increasing the number of clients, enhancing customer satisfaction levels and boosting profitability. Set KPIs that allow you to track those targets.  

To stay organised and measure your KPIs, you can use accounting software. You should also include KPIs in your management accounts which show up-to-date information about a business and can be used to make strategic decisions.  

Examples of financial KPIs to monitor 

Profit margins 

To measure your business’ profitability, you need to know your profit margin. It shows how much money your company retains once costs have been deducted. The higher the margin, the more profit you are making.  

Profit margins, which are measured as a percentage, are important for understanding your costs. They also help with setting and, when necessary, increasing your prices. 

There are three types of profit margin to understand: 

Gross profit margin: This is the amount of revenue that stays in your business once direct costs have been deducted. Direct costs are those directly linked to the production of your products or services. Examples include raw materials, transporting goods and wages for the people who manufacture a business’ products.  

Operating profit margin: This is the percentage of income your business retains once your day-to-day operating costs have been deducted. These are variable expenses such as rent, marketing and insurance.  

Net profit margin: This is the percentage of revenue retained by your business once you have deducted all direct costs, operating expenses, interest payments and taxes. 

An accountant can help you work out your profit margins.  

Working capital 

Working capital is essential to the smooth running of your business. It is the amount of money you need to run your operations and pay your bills. You can calculate it by subtracting your current liabilities from your current assets. 

Positive working capital means you have enough cash to cover your debts and other expenses. Negative working capital means your business’ liabilities are more than your assets and you don’t have enough money to pay your debts.  

Working capital is different to cash flow, because it takes into account liabilities and assets that will affect your business during the financial year. In contrast, cash flow indicates the money coming into and moving out of your business at a particular point in time.  

Quick ratio 

Quick ratio, also known as the acid test and the quick assets ratio, is an important KPI for monitoring your cash flow. You use it to work out if your business can cover its short-term liabilities without the need to sell inventory or take on extra funding.  

To calculate quick ratio, you need to divide your most liquid assets such as cash, cash equivalents and accounts receivables by your business’ total current liabilities. The higher the ratio, the more financially healthy your business is. If the ratio is below 1.0, you may have problems covering your bills. 

Total sales revenue 

Your sales revenue is the amount of money received as payment for your business’ products or services.  

You need to track sales revenue for your company accounts, but it can also be a KPI. Monitoring both upward and downward trends in sales will indicate the financial health of your business and give you the information you need to take steps to fix any problems.   

Accounts receivable days 

This is the measurement of how long on average it takes your customers to pay an invoice after they purchase your products or services.  

The formula for calculating your accounts receivable days is as follows: 

Accounts receivable days = (accounts receivable / total revenue) x 365 

Knowing this number will say how good your business is at collecting payment from customers. It is also important for understanding how accounts receivable impacts on your cash flow. If the number is increasing, you may have a problem with a late payment and need to take steps to deal with it.

Accounts payable days 

This is an indication of how long on average it takes your business to pay its creditors.  

While prolonging payments can be positive for cash flow, it could indicate financial instability. Paying your bills on time will ensure your business maintains a good credit history which is important if you want to successfully apply for a business loan.  

Cost of customer acquisition 

Customer acquisition cost (CPC) is the average amount of money your business spends to secure a new customer. To calculate this metric, you need to divide the costs involved with converting a customer, by the number of customers acquired. 

Monitoring your CPC will indicate if you are getting good value from your sales and marketing efforts. It may show that you are spending too much and need to cut marketing costs and place more focus on upselling to existing customers. Comparing the CPC to lifetime customer value, will provide an indication of the long-term sustainability of your business. 

Need help with setting and monitoring KPIs? 

TaxAssist Accountants can help you with the right advice about key performance indicators to grow your business. Call 0403 184 157 or complete the online enquiry form to arrange your free initial consultation.  

Date published 5 Oct 2022

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.