As a business owner on your entrepreneurial journey or just starting your business, it’s easy to lose sight of where the business stands. This is especially true when seeing profits! But a successful business is best maintained by setting KPIs (key performance indicators). You’re already tracking profits, but let’s look at the other factors.
When you started your business, you likely developed your business plan and model, so you are already off to a great start! KPIs are specific to your business but can include: income by customer if you sell a product; revenue by service type if you consult; and keeping tabs on sales tax which may require an expert. Whatever is unique to your business, it’s important to set a tracking benchmark. This can be annually, quarterly, monthly or maybe even weekly.
Here are 5 financial areas to consider when setting up the most important KPIs.
Reviewing Gross Profit Margin
Key is understanding your gross profit margin. It’s the money left, or profit, after deducting the cost for what you sold. This is a great temperature check for the financial success of your business. It nets out what you made after your investment. Although, this may seem basic, remember to look at all costs. These include your overhead, employees and a percentage of the cost to run your business, like electricity and even a printer cartridge. For this reason, gross profit margin is often expressed as a percentage of sales and may be called the gross margin ratio. All aligning with your KPIs.
Forecasting Cash Flow
A business runs smoothly with the right cash, so this is an important step. The U.S. Small Business Administration offers great resources on managing finances for your business.
Overall, you will look at money in and money out. By starting with a balance sheet, you can track capital and project income, while accounting for your costs. At this point, it’s helpful to determine accrual or cash methods of recording purchases. Again, remember to align with your KPIs. This could, or should, be by segments of your business.
Incorporating Tracking Systems
So now let’s look at how you will be tracking those KPIs. Is it manually, or do you have a software such as POS or a bookkeeping software? Also, consider who oversees supplying this the information. Many systems offer automatic feeds.
Whether its through software or manually, areas to consider vary by industry. But range from employees, customer retention and, of course, your gross profit margin. By having KPIs to reference, you can adjust areas that impact your financial result.
Ensuring Customer Retention
Let’s talk about keeping customers coming back. Once you’ve formed a solid customer base, you want to retain and grow them. This is presumably easier, and less expensive, but still requires effort. As a business owner, you surely know the time and effort to build something. But maintaining is much more fluid.
Your customer retention activities or program can be ensuring value, a loyalty program or even special discounts. These discounts will still cost you less than acquiring a new customer. Of course, new customers should still be part of your business effort.
Monitoring Debt Ratios
The same way you are checking profit margin and cash flow, you need to be aware of your debt ratio. This is also called debt to income ratio. Bankrate offers this simple calculator to determine your debt ratio. Generally, 40% or lower is considered a good debt ratio. This is vital for you, the business and potential investors. Or for financial loans to scale your business.
Every business requires its unique set of KPIs. DCC Accounting offers management consulting services in a variety of industries to help businesses thrive.