5 Financial KPIs Every Small Business Should Start Tracking | Emerald Expectations

Jun 24, 2024CFO

Hi there! If this is your first time on our site, let me introduce myself. I’m Kimberly Ferguson of Emerald Expectations. I’m an EA and a fractional CFO who has helped numerous small business owners manage their businesses’ finances. My team and I will help take care of your business’s accounting, taxes, and other financial aspects so you’ll know exactly what to focus on to grow your business and reach your monthly financial targets. We give you the freedom to spend more time on things that matter to you the most, such as quality time with your loved ones.

As a fractional CFO, one of my most important recommendations to small business owners is to set and track KPIs, or Key Performance Indicators. Doing this allows you to know and understand your business goals, and it also allows me to do my job better and help you!

If you’d like to work with us, take our Fit + Pricing Quiz to get started.

What are Key Performance Indicators (KPIs)?

A KPI is a quantifiable measurement to gauge a company’s overall long-term performance and success. It’s vital for all businesses, but especially small businesses, to set KPIs because it gives them a clear picture of how the business is doing and if it is on the right track towards its goals.

There are various types of KPIs. While this article will focus on financial KPIs, there are other essential KPIs your small business should also set and monitor. Some of the other types of KPIs are the following:

Strategic KPIs

Strategic KPIs are high-level KPIs that measure a company’s long-term goals. These KPIs help connect long-term goals to day-to-day decision making. They also help determine if a business strategy is working and if this particular strategy is helping the company hit its long-term goals.

Operational KPIs

These types of KPIs measure how the performance of a business day over day or month over month. These short-term KPIs look at business processes and segments to see if the business operates as efficiently and effectively as possible. Members of the management team use and carefully monitor these KPIs daily, weekly, or monthly.

Marketing KPIs

Marketing KPIs are those that measure marketing activities and their results. Typical examples are website traffic, click-through rates (CTR), blog articles published each month, and social media traffic. Anything related to marketing that can be measured can be a Marketing KPI.

Human Resources (HR) KPIs

Some businesses also analyze KPIs related to their employees. If you have a small but growing business, setting these types of KPIs may also be beneficial. Examples of HR KPIs include employee turnover rate, absenteeism rate, and employee satisfaction.

These are just a few examples of the KPIs you can set for your small business. We recommend you choose a few KPIs and remember them during your strategic planning sessions and day-to-day operations.

7 Key Performance Indicators Small Business Owners Should Track … and How to Do it

Aside from strategic or marketing KPIs, a business should also set financial KPIs. As mentioned above, this article will specifically discuss these types of KPIs. Here are seven financial KPIs all small business owners should track and how to do it:

1. Profitability Ratios

There are several types of profitability ratios. These ratios help assess how well a company can generate earnings or sales while keeping its expenses low. It measures sales or revenue versus balance sheet assets, operating costs, or equity. Remember that profitability ratios should be used as comparison tools, not isolated metrics.

Here are a few examples of commonly used profitability ratios:

  • Gross Profit Ratio – The difference between a business’s sales revenue and cost of goods sold or COGS. A high gross margin means a company is making a profit over its costs. This also usually means a company can charge higher, or a premium, for its products.
  • Net Profit Margin – This profitability ratio takes the company’s net income and divides it into total revenue. The net profit margin is basically a company’s bottom line. It is an important profitability ratio because it takes all expenses, including taxes and interest, to determine if a company is profitable. However, one drawback of the Net Profit Margin is that it includes one-time costs and gains, which can affect overall net profit and not accurately represent the company’s overall financial health.
  • Cash Flow Ratio – This profitability ratio is the relationship between cash flow from operating expenses and sales. It measures how a business is able to convert sales into cash.

A high cash flow ratio means more cash available from company sales to pay for supplies, utilities, dividends, and purchase assets. A negative cash flow means even if the company is generating sales, it might still not have enough money to cover operational costs and will need to borrow or raise funds to continue operating. A ratio greater than 1 indicates a company’s good financial health, while a negative ratio means the company is experiencing financial strain.

Aside from the ones mentioned above, you can use other profitability ratios for your financial KPIs, such as Return on Investment and Return on Asset.

2. Liquidity Ratios

Liquidity ratios divide current assets by current liabilities. These ratios measure if a company can pay off current debt without borrowing or raising additional money from external investors. Some commonly used liquidity ratios include current, days sales outstanding, and quick ratios.

  • Current ratio – To get the current ratio, divide the company’s assets by its current liabilities. Current assets mean cash, accounts receivable, and inventory. Current liabilities are any debts or liabilities payable within one year.
  • Days Sales Outstanding – This ratio, also known as DSO, is the average number of days it takes a business to collect payment after it makes a sale. A high DSO means the company is taking too long of a time to collect payment from its customers. To compute for the DSO, divide the average accounts receivable by the revenues per day. For example, if it’s taking your company weeks to collect payments from customers, this is too long and you need to adjust how you are collecting.
  • Quick Ratio – Another name for the quick ratio is the acid-test ratio. It measures a company’s ability to meet its short-term obligations with its most liquid assets, so it removes inventory from this measurement. To get the quick ratio, get the sum of the company’s cash, marketable securities, and accounts receivable and divide the answer by its current liabilities.

Liquidity ratios help give small businesses a clear picture of how liquid (or how much access it has to cash) the company is.

3. Debt to Equity Ratio

To get the Debt to Equity ratio, divide your company’s total liabilities by its total shareholder equity. This ratio measures a company’s financial leverage by looking at how much debt the business has compared to its own resources or equity. It’s good to compare this ratio to the ratio of competitors. A higher D to E ratio may mean more risk, while a low D to E ratio may mean your business is not taking advantage of debt to grow your business. An excellent D to E ratio is somewhere in the middle, meaning you have just the right amount of debt to help you have a bigger business.

4. Customer Lifetime Value (CLV)

The Customer Lifetime Value, or CLV, predicts the total net profit your business can expect to earn from a single customer throughout their entire relationship with your company. This KPI helps businesses understand how much each customer brings in, which helps guide strategies and decisions when it comes to customer acquisition, customer retention, product development, and marketing initiatives.

The formula for CLV is customer value multiplied by the average customer lifespan. This is a particularly helpful KPI for businesses with a subscription model or with return customers. For example, the CLV is not beneficial for a bridal gown store because most people buy wedding gowns once, maybe twice, in their lives. For most companies, it is ideal for the CLV to be at least three times greater than your Customer Acquisition Cost, which will be discussed below.

5. Customer Acquisition Cost (CAC)

Another KPI that every small business should keep track of is the Customer Acquisition Cost (CAC). This is the total amount your business spends to acquire a new customer. This amount includes marketing costs and other expenses you need to spend to get a new average customer.

To get your CAC, divide the total marketing costs spent on getting new customers by the number of new customers you got when the marketing costs were spent. This is a good KPI to monitor and compare to Customer Lifetime Value (LTV). Knowing this figure can help you with long-term strategies and short-term decision making. For example, if you learn that it costs more to get new customers than retain existing customers, you can start thinking of marketing strategies to keep existing customers happy with your business.

6. Revenue Growth Rate

Revenue Growth Rate is one of the most important KPIs, especially for startups. It measures the month-on-month percentage increase in your company’s revenue. This KPI gives you a clear picture of how fast your business is growing.

Get your company’s Revenue Growth Rate by subtracting the first month’s revenue from the second month’s revenue. Then when you have the answer, divide it by the first month’s revenue multiplied by 100 to make it a percentage.

7. Break-Even Point (BEP)

Another useful KPI for a small business is the Break-Even Point (BEP). This is the point when a company’s total revenues and expenses equal each other. At this point, revenues and costs are the same, so there is no profit yet, but the company is also no longer losing money. Once you surpass your company’s break even point, then your business begins to become profitable, or in simpler terms, starts making money.

To compute your BEP, divide your fixed costs by your sales price per unit, minus the variable costs per unit. Once you know your BEP, you’ll know how many units or items you need to sell to stop losing money and, hopefully, start making more money.

For example, you sell pens. This is how to compute for your BEP:

Fixed costs: $1,000 for the month
Variable costs: $.30 per pen produced
Sale Price: $2 per pen

= 1,000/2-.30
= 1,000/.70
= 1,428.57

You must sell over 1,428 pens monthly to reach your BEP. This number lets you know the minimum number of pens you should sell in a month to break even. Knowing the BEP will also help you decide if the business is worth pursuing or what adjustments to make. For example, when you compute for your BEP you realize you need to sell 10,000 pens a month. How would you go about it? Would it even be possible? This is why this is an important KPI to measure.

When you surpass the BEP, you’ll know that you’re starting to earn profit.

These are crucial financial KPIs every small business should be tracking. As a small business owner, you need to be on top of your company’s financial health, and you can do this by setting and monitoring your KPIs.

By doing so, you’ll have the information you need to make informed decisions about your business. For example, if your Customer Acquisition Rate is too high and eating into your profits, you’ll need to evaluate your marketing strategy and initiatives. Maybe you are spending too much on ads but not seeing enough results.

Setting KPIs should be part of running your business. Remember, how will you know what you’re working towards if you don’t have goals? If you’re not sure where to start when it comes to KPIs, don’t worry, that’s why we’re here! We can help you choose which KPIs to set and suggest how to meet them.

Let Emerald Expectations help your small business track these KPIs and take control of its financial health today and in the future. Take our Fit + Pricing Quiz to get started.

Hi, I’m Kimberly.

Thanks for stopping by. At Emerald Expectations, we love making a big impact on small businesses like yours by educating, growing profits, increasing cash flow, and reducing your tax liability.

If you’re always worrying that something important is falling through the cracks or you feel like your current tax or financial strategy is lacking, we can help you offload that stress so you can feel at peace knowing everything is being taken care of.

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