Growth can be difficult to see when it happens in increments. Likewise, it can be impossible to achieve your growth objectives if you haven’t defined your goals and as a result, you don’t know what’s required in order to reach them.
At Select Funding, we power small business growth by providing flexible and affordable financing, including short-term loans and equipment financing. We understand that growth is most likely to occur when everybody in your organization knows what your goals are and what’s expected of them. Since we believe that measuring growth is the key to sustaining it, here are 13 financial metrics and KPIs for small business that you should consider tracking.
What Are Financial Metrics?
Financial metrics are a type of business metric. Business metrics are quantifiable measures of some aspect of business performance. Business metrics allow businesses to analyze the data they collect and use it to assess their progress and status. They may also be referred to as Key Performance Indicators or KPIs.
Financial metrics are business metrics that measure the financial performance of a business. They include metrics that measure every aspect of a company’s financial performance, including the following:
- Assets
- Capital
- Expenditures
- Liabilities
- Profits
- Sales
Financial metrics provide an overview of a company’s financial status and can also help to forecast future sales and growth. They can also be useful in determining the value of a company.
Why Are KPIs Important for Small Businesses?
As a small business owner, it’s likely that you find yourself wearing multiple hats in the course of the workday. That being the case, it’s essential to have a way to keep an eye on your company’s performance without adding to your already full plate.
KPIs provide business owners with key information about their business and its performance. Tracking them means that you can monitor every aspect of your finances and make sure that you’re making progress toward your most important goals. Here are some of the major benefits of tracking financial KPIs for small businesses..
Even Out Cash Flow
Tracking financial metrics and KPIs can help you manage your cash flow. Without enough cash flow, you may find that you don’t have the money on hand to pay your operating expenses, let alone pursue your growth goals.
Eliminate Organizational Inefficiencies
Even the most eagle-eyed business owners can miss seeing issues with organizational inefficiency because they can’t be everywhere at once. Tracking KPIs can help you spot areas where you might be overspending or not getting a big enough return on your investment.
Improve Performance
For a business to succeed, everybody on the team must be working toward the same goals. Tracking KPIs puts everybody on the same page, aware of what’s expected of them and ready to work together to hit important milestones to help the business grow.
Provide Information to Investors
When an investor requests a financial overview of your business, it’s essential to be able to provide them with accurate information that conveys both your company’s current status and its future potential. KPIs are useful because they can do both – and in a format that’s easy for investors to understand.
Increase Confidence
Tracking financial metrics provides business owners with a clear picture of what’s happening with every aspect of their business. They can inspire confidence because they eliminate guesswork and doubt.
13 Financial Metrics & KPIs to Measure Growth
Now that you understand why you should track financial metrics & KPIs and how tracking can improve your business performance, here are 13 metrics that you can use to measure your growth.
#1: Accounts Payable Turnover
Accounts payable turnover measures how quickly you are able to meet your financial obligations by paying your vendors and covering your expenses. You can calculate your accounts payable turnover using this formula:
Total Purchases on Credit / [(Beginning Accounts Payable + Ending Accounts Payable) / 2]
Ideally, the ratio should be as high as possible. A low number indicates that you may not have enough operating cash flow to cover your expenses.
#2: Accounts Receivable Turnover
Your accounts receivable turnover is the reverse of your accounts payable turnover because it measures how quickly you are able to collect money that’s owed to your company. You can calculate it using this formula:
Net Annual Credit Sales / Average Accounts Receivable
This KPI uses an average because accounts receivable may vary from month to month. The ideal ratio is as close to 1.0 as possible, since that would indicate that you are collecting the average amount of your accounts receivable in every period.
#3: Conversion Rate
Your conversion rate measures how effectively your marketing and sales teams are at taking a prospective customer and turning them into a paying one. Here’s the formula to calculate it:
Number of Visitors or Clicks / Number of Sales
There’s no one-size-fits-all target number for conversion rate because what qualifies as a good rate changes from industry to industry. However, in most cases you should be looking for a conversion rate between 2% and 5%.
#4: Current Ratio
The current ratio is a KPI that measures the liquidity of your business, or the ability to meet your financial obligations in the short term. Here is the formula:
Current Assets / Current Liabilities
Here again, what’s considered good varies from industry to industry but in general, you want a current ratio of at least 1.0.
#5: Customer Acquisition Cost
The customer acquisition cost, or CAC, measures how much money it costs your company to acquire new customers. As a rule, it is far more expensive to acquire new customers than it is to retain existing ones. Here’s the formula:
Total Marketing Expenditures / Number of New Customers Acquired
CAC averages can vary widely depending on your industry. For example, a good CAC in retail might be $10 whereas a good CAC in the manufacturing sector is $83.
#6: Employee Utilization
Your employees are essential to your business success and it makes sense to want to monitor how wisely their time is spent, particularly if you’re relying on employee billable hours. Here’s the formula to calculate your employee utilization:
Total Working Days / Billable Working Days
Your employees won’t be able to bill every hour of the day but you should aim for an employee utilization rate between 85% and 90%.
#7: Gross Profit Margin
Your gross profit margin is a measure of how much money you make on the products you sell. Here’s the formula:
(Revenue – Cost Of Goods Sold) / Revenue
You may also want to calculate your gross profit margin ratio, which you can do by dividing your gross profit margin by your net revenue and multiplying the result by 100. In most cases, you want a gross profit margin ratio between 50% and 70%.
#8: Net Profit Margin
Your net profit margin measures how much money you’re making after netting out your expenses. Here is the formula:
(Net Income / Profit Margin) X 100
In most industries, a net profit margin of 10% is considered very good; a margin of 20% would be exceptional.
#9: Operating Cash Flow Ratio
Having predictable cash flow is essential because it has a direct impact on your ability to meet your financial obligations. Here’s the formula to calculate your operating cash flow ratio:
Cash Flow from Operations / Current Liabilities
You’ll know you have sufficient cash flow when you have a ratio of 1.0 or higher.
#10: Working Capital
Your working capital measures how well your business can meet its short-term obligations. The formula to calculate it is simple:
Current Assets – Current Liabilities
You may also want to consider tracking your working capital ratio, which you can do by taking your current assets and dividing them by your current liabilities. Ideally, the resulting number should be between 1.2 and 2.0.
#11: Debt to Equity Ratio
Your debt to equity ratio measures how much of your business capital comes from debt and how much from the shareholders’ equity. Here’s the formula to calculate it:
Total Liabilities / Shareholders’ Equity
The resulting number is an indication of risk in your company’s capital structure. A ratio of 1.0 or higher indicates that most of your capital comes from debt, so you should aim for a lower ratio to stabilize your company financially.
#12: Inventory Turnover
Your inventory turnover is a measure of how well your company is using its investment in inventory to generate sales. Here is the formula to calculate your inventory turnover:
Cost of Goods Sold / Average Inventory
The higher your inventory turnover ratio it is, the more efficiently your inventory is being turned over. If you’re forced to hang onto inventory too long, it costs you money.
#13: Incremental Sales Revenue
If you want to get a handle on how effective your marketing is, you can do so by calculating your incremental sales revenue using this formula:
Total Sales – Expected Sales Without Marketing Campaign
You’ll need to use historical sales data to project your sales without the marketing campaign. You can divide the result by your marketing costs to calculate the ROI of the campaign.
Are You Ready to Achieve Your Business Goals?
Tracking financial metrics and KPIs can help you keep an eye on your business performance and customer satisfaction while you’re doing other things. Since most metrics can be tracked automatically, you can do so easily and without spending more than you can afford.
Are you seeking short-term business financing to help you achieve your growth goals? Select Funding has the options you need! Click here to read about our business loans.
