Every business relies on financial reports to aid in decision-making, however, small businesses, in particular, should be extra vigilant when analyzing their finances. Unlike a lot of larger businesses and corporations, small businesses usually don’t have as much financial safety netting. This makes tracking finances all the more important when it comes to determining progress, achieving goals, and creating operational guidelines.
While all financial data can be beneficial to some degree, knowing which metrics are the most valuable to examine can save you time, energy, and money. They can also help you keep a consistent finger on the pulse of your company, objectively tracking its success through numbers. When running a business, there’s a lot of value in learning to follow your instincts. However, it seems the most successful of small business accountant Charlotte NC owners have learned to strike a healthy balance between listening to gut intuition and trusting the numbers. In this blog post, we’ll help you get started, by listing out various metrics and why they’re worth keeping an eye on.
What is a Financial KPI?
Before we dive into the specific metrics, it’s beneficial to familiarize yourself with the term KPI. KPI is an abbreviation for key performance indicators. Financial KPIs will reveal the financial well-being of your business by juxtaposing your business’s performance versus the financial goals you’ve put in place. KPIs are also the foundation on which you’ll build your financial strategy, allowing you to make advantageous moves as you navigate running a small business.
To get the most out of metrics and KPIs, you should consider sending out weekly or monthly updates internally to team members and employees. The exact frequency can be determined based on your specific business needs, however, basic updates via email, reports, or dashboards can make a massive difference in how you approach your finances, and ultimately, promote habits that lead to success.
Important KPIs and Metrics to Analyze
Now that you know the terminology, here are some of the financial metrics and KPIs that are popular for small businesses to track and evaluate.
Gross Profit Margin: The gross profit margin measures what percentage of your revenue is leftover after factoring in the cost of goods sold. At its most basic, it is the difference between revenue and the cost of goods sold. To calculate the gross profit margin, simply subtract the cost of goods sold (aka COGS) from revenue. The actual formula is as follows:
Gross Profit Margin = Gross Profit / Revenue x 100
The overall purpose of calculating the gross profit margin is to determine the profitability of your business. It’s particularly useful when trying to assess the profitability of a product or item line. Essentially, gross profit margin helps you determine overall financial health. Ideally, you want to establish a healthy percentage and work hard to keep it from fluctuating dramatically.
Net Profit Margin: Yet another margin expressed as a percentage, the net profit margin, or net profit, is generated as a percentage of revenue. It determines how much net income is generated from every dollar of revenue. The net profit helps your business determine if it’s generating enough profit from sales. It also illuminates operating and overhead costs, and if they’re being kept under control. Net profit is a useful tool for establishing current financial health, and forecasting potential and future profits based on revenue.
Cash Flow/Operating Cash Flow: Business can be complicated, but when it comes to money, it’s quite simple. Lack of money equals the death of a business. Operating cash flow is a direct measure of how much cash the business has following its operations. Cash flow can be either positive or negative. Positive indicates that there is cash available to grow operations. On the contrary, negative means in order to maintain current operations additional financing would be required. Operating cash flow is typically found on the cash flow statement, giving you insight into your business’s current success. Negative operating cash flow serves as a warning that it might be time to intervene and make some financial changes.
Regulatory Requirements for your Industry: While a lot of KPIs and metrics are applicable to all types of small businesses, knowing the regulations surrounding your specific industry is incredibly important. Beyond metrics, as a small business, you should always be looking into financial data and tax information relevant to your own industry. This type of information is extremely valuable, although not as readily available as generic financial data. Point blank, these are the fees that are specific to your industry and therefore should be thoroughly researched. Lots of industries require certain licenses, accreditations, and certifications. There are also specific financial obligations such as quarterly submissions, minimum capital, and financial ratio requirements. To avoid heavy financial penalties, stay on top of industry-specific regulations.
Customer Acquisition Cost: It’s pretty self-explanatory. A business cannot survive without a customer base. However, building that customer base usually comes at a cost. This specific rate is determined by how much your business is spending on marketing, manufacturing, and distributing as a means of obtaining new customers. This is particularly important for new businesses that are trying to extend their reach. Without an established corporate name to draw from, you’ll need to get clients interested in your business. This doesn’t typically happen overnight and generating interest will require money, devotion, and time. Fortunately, in the age of the internet, there are many ways to advertise and some of them, such as social media, can even be done at a low cost or free. If you’re lucky, you might just have a social media post go viral, translating into instant traffic to your business. However, be prepared to put in the proper time so that you can get customers into your store, or onto your website.
And Many More: Ultimately, there are a lot of other KPIs to consider, among them: working capital, current ratio, debt-to-equity ratio, inventory turnover, profit margin, etc.
A Professional Can Help
If you’re still trying to determine what KPIs you should be tracking, you can always enlist the help of a financial professional. Navigating KPIs and metrics will become an easier process as you spend time reading reports and deriving information. Consulting a professional bookkeeping Charlotte NC can help you determine which metrics are the most valuable for you to consider, and how to read financial reports purposefully to get the most out of them.
At McGrant Tax And Bookkeeping, we are here to help answer all your questions as your primary bookkeeper in Charlotte NC. Please feel free to contact us today at any of our two locations or visit our website https://mcgranttax.com and book an online or physical appointment.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. McGrant Tax and Bookkeeping assumes no liability for actions taken in reliance upon the information contained herein.
