Measuring success is a fundamental part of everything we do. Got a smartwatch? Chances are you track your exercise or daily steps to help you improve your fitness levels and overall health. If you’re a small business, you may have a management information (MI) tool, such as accountancy software. These systems help you improve the health of your business. They track information from different sources so you can monitor key areas of your business and ensure you’re achieving your goals.
What are KPIs?
KPIs – key performance indicators – are measurements that show how well your business is performing. They give you the information you need to make the right business decisions and enable you to plan for the future.
Not only do KPIs show you when you’re on the right track, they also identify where things aren’t working. You can then take action to improve those areas before they turn into bigger issues.
Which KPIs should I choose for my small business?
There’s no one-size-fits-all approach for KPIs. You can choose a combination of standard business KPIs and ones more relevant to your business, taking into account things like:
- Its size
- What stage your business is in the business life cycle
- The business sector you work in
- Your business objectives
As a small business owner, your primary focus is likely to be how profitable your business is. However, there are other areas you should track along with profitability, such as cashflow.
Consider your business goals. Do you want to create a new product? Become more well known? Open a second branch? Identify the most important metrics for hitting these goals and include them in your KPIs. If you’re not sure what the right KPIs are for your business, your accountant will be able to help.
What are some useful KPIs for small business?
There are some KPIs that all businesses usually track. They make an excellent starting point when setting your KPIs.
Gross profit is the amount you make from sales minus what it costs you to make your goods.
For most businesses, making profit is their most important goal. The gross profit KPI tells you how much profit your business is making rather than how much you’re spending.
If your profit margin is increasing, your business strategy is working. However, if you are spending more than you are netting in sales, you should try to reduce costs or increase the price of your goods.
Net profit is your gross profit minus operating costs – for example, rent, utilities and employee’s wages.
Net profit helps you to understand how profitable your business is. Measuring it will help you make the right decisions about how to run your business and create future financial forecasts. You can also use it to compare your business against your competitors.
Similar to gross profit, if your net profit is decreasing, you need to review your outgoings, cost of goods and pricing strategy.
Another critical element to measure is cash flow. As the saying goes, Turnover is vanity, profit is sanity but cash is king. Cash flow is the amount of money that comes in and out of your business. A cash-flow forecast estimates the amount of money you think your business will receive and pay out over a time period, usually 12 months.
Monitoring cash flow is essential for all businesses. If you’re just starting out, it will help you understand the business you are building and work out if it is sustainable.
Your cash-flow forecast can tell you:
- How workable your pricing strategy is
- Where you’re overspending
- What your business risks are
- Whether you have enough money for expansion
Debtor days or debtor collection period is a measurement of how quickly your business gets paid. It’s the average number of days you take to collect payments from your customers.
Debtor days can help you see the overall state of your business. The longer your debtor collection period is, the less cash you’ll have in the business. It may lead to you not being able to pay your suppliers or invest in expansion.
Inventory turnover measures how well you manage your stock (including raw materials, WIP and completed goods). It calculates the cost of goods sold divided by average inventory sold in a year.
Inventory turnover can help you manage your stock better, see how competitive you are in your industry, and to show potential lenders your stock value.
Non-financial KPIs should also be included as part of your measurement strategy as they give you a more detailed overview of your business. They will also help you identify which areas of business performance you need to focus on. Examples of non-financial KPIs are:
- Website traffic
- Customer satisfaction
- Customer loyalty
- Employee retention rate
Getting your KPIs right will have a positive impact on the profitability and long-term success of your business. Involving your accountant in the process will ensure you choose the right ones.
If you are looking for advice on how to maximise the use of your management information and to set the right KPI’s for your business, call us today and talk to one of our team about how we can help.