According to Forbes news reports and expert reviews, tracking KPIs in any business is the best way to understand the successes and failures of your company. It also helps you keep track of your business vision from time to time, sets a path for your employees, and initiates better strategy and leadership planning for better growth. When you run a small business, it becomes even more important because budgets are generally very tight in such cases. And if you do not keep checking your KPIs, your cash flow might take a hit even before you realize it.
As per the U.S. Bank study and Score survey, more than 82% of small businesses fail due to problems with their cash flow. To avoid such a situation in your small business, take a closer look at your Key Performance Indicators (KPIs) and financial metrics to stay in touch with your financial situation constantly. Tracking these also helps small businesses understand if they have enough money to make bigger investments and grow or if their budget has become unrealistic.
Constantly checking on these metrics will also allow businesses to predict worst-case scenarios like insolvency or bankruptcy. You can then plan ahead and mitigate these issues beforehand. But what are the most important KPIs and financial metrics that you must never ignore? Are you finding it hard to establish them? Read this article to get a detailed list of the KPIs and financial metrics you must track and why they are important.
Top 7 KPIs and financial metrics that you should watch
These are the metrics that are vital to your business. Check them out below.
The revenue you generate and expenses
The revenue of your business is the amount of cash in your banks before you take out the regular expense amount from it. You need to track revenue and expenses to ensure that the values add up and that you still have enough extra cash left to calculate your profits and business turnover.
When you track your revenues and expenses, you also get a clear picture of the amount of business you expected in a time period against the business you had. If you did not perform as per expectations, you could revamp your strategy and leadership to make better future growth plans.
Net income and operating cash flow
The net income is the money left after you deduct the regular expenses. Keeping track of this shows you how much money you have in your accounts to fall back on. Above this, you should also track the operating cash flow of your business. This will show you the metrics of the regular cash incoming and outgoing from your business against your services/products. Starting a small business can seem tedious, but once you're done with the paperwork, it will be easier.
Business News Daily reports show that more than 61% of small businesses struggle with their cash flow. To not be one of them, plan ahead and keep track of your cash flow. This will help you judge if you have enough money to keep the daily operations of your business going or if the cash flow is becoming negative.
Budget vs. actual spending
It is assumed that every business makes a budget at the beginning of a financial year or makes a monthly or quarterly budget. But Clutch survey and statistics have found that more than 50% of small businesses do not have any formal budgets. If you do not have a budget in place, you lack the most basic yardstick to measure your progress.
When you make a budget, you can keep your expenditure within your financial limits. You can also look back at the budget and compare it with actual spending to understand if your budget was practical or simply utopian. A budget helps you understand your business better and gives you more control over your finances.
The aging of Accounts Receivable and Payable
The aging of AR is the number of days and the customers/vendors take to pay your bills. This means you can start rethinking your invoicing and payment collection processes to speed up the process and help stabilize your cash flow. If your AR aging is too high, it will definitely hurt your cash flow.
The aging of AP is very similar; it is the number of days your business needs to pay its own bills. If this rate is also very high, it speaks a lot about your finances. It means that you most probably lack the basic in-hand cash and operating cash to pay your bills before deadlines.
Break-even point
Break-even point calculation is important because it helps you know when your revenue is equal to running costs; hence your net profit or loss is zero. When you have this data, you can analyze and rethink the price of your products/services or make plans to grow sales and increase your revenue collection.
The average cost of customer acquisition
Knowing your customer acquisition costs helps you determine how much time and revenue your business uses to get new customers. If you analyze and see that the prices are too high, then something must be wrong with your business planning. It is time to take a closer look at your strategies and marketing and sales plans to learn where you are going wrong.
The customer churn rate
Churn reports are one of the most important KPIs to track. This tells you after how long a customer stops using your services/products. You can then know if this churn rate is sustainable for your business or if customers are leaving too soon.
Take care of your KPIs and business finances with Assetsoft
When you run a small business, each person has to take care of many different roles since resources are on the lower side. But if this leads to you ignoring your finances and KPIs, your business might actually be heading for much bigger problems.
From optimizing your financial resources to taking care of all variables and risk factors, at Assetsoft, we can provide you with end-to-end financial services. Why get overwhelmed handling your finances when you can simply get outsourced financial services from us? We will give you the best budget-friendly yet on-time deliveries.
Book a free consultation call with our team to know all the details about our services. Talk soon for more!