In our experience, many small businesses don’t know which key performance indicators (KPIs) they should be tracking, how to access the relevant information, or what those metrics actually mean. Tracking specific metrics and financial KPIs allows you to see how you’re performing against your targets – so you can take action to improve performance, sales, growth and profitability.
So which KPIs should you be tracking?
Sales And Conversion Rates
An obvious metric to track is the number of sales you’re making each month. You should have a target for these sales in your business plan, so you can see how your business is performing month-by-month.
It’s also important to understand and track the drivers that lead to these sales. How many sales enquiries are you receiving? How many of these enquiries are being converted into actual sales? How many customers are being engaged by your marketing campaigns, and is this engagement leading to interest in your products and/or services?
The more detail you can track from your sales and marketing activity, the more forensic you can get with which campaigns are delivering the goods.
Sales Revenue And Other Revenues
Tracking your sales revenue is a vital measure of your financial health. Tracking your revenue streams over time keeps you in control of your finances and helps you make the right decisions. You can track performance against your revenue targets. You can forecast how much working capital you’ll have at a future point in time. And you can see if there’s enough cash in the bank to fund your projects and growth plans.
Cashflow And Ongoing Cash Position
Good cashflow management is all about balancing the process of cash coming in against cash going out of the business. Recording and tracking your cash position is easy to do with the latest cloud accounting software and cashflow apps, so there’s no excuse for not tracking your cash position.
Ideally, you want the business to be in a positive cashflow position (with more cash coming in than going out). But to achieve this, it’s helpful to see these cash inflows and outflows in real-time. With up-to-date metrics on your cashflow position, you can make informed decisions about spending, paying bills and where additional cash and funding may be needed.
Debtor Days And Aged Debt
When customers fail to pay your invoice on time, that creates an aged debt – money that you SHOULD have received but which the customer has yet to pay. An aged debtor report shows you which invoices are unpaid, which customers haven’t paid, and the total size of this debt.
Your debtor days number is a metric that shows the average number of days it takes your customers to pay you. Anything above 45 days is bad news so aim to keep this number between 14 to 30 days if possible. A large amount of aged debt will leave a hole in your cashflow – and that can quickly start to impact on the day-to-day running of the business.
Gross Profit Margin
Generating a profit is crucial to the continued success of your business and having metrics to measure your profitability is an important part of managing your finances.
One common way to do this is to track your gross profit margin. This metric shows the amount of profit made BEFORE you deduct things like overheads and the cost of goods sold (COGS), shown as a percentage. The formula for calculating your gross profit margin looks like this:
Gross Profit Margin = Gross Revenue minus COGS, divided by Net Revenue, multiplied by 100
- Deduct your COGS value from your gross revenue to find your gross profit.
- Divide this gross profit by your revenue.
- Multiply the resulting number by 100 to get a percentage.
- This is your gross profit margin as a percentage of gross profit
- A percentage of 50% to 70% is healthy, but aim for as big a margin as possible
By keeping a close eye on these financial metrics and KPIs, you have the best possible insight into the financial performance of your business. Did you know Xero can track these for you? Please contact us if you need help setting up your metrics and KPIs.