Whether it's a steady buzz around goods and services or sold-out shelves, there are many different metrics to measure the success of a small business. In many cases, the state of your financial affairs paints a clear picture of both your business' present and future. Here, we break down the most effective KPI's for evaluating the financial performance of your small business.
Why do I need to measure my business' finances?
It's a money driven world, therefore it's vital that businesses monitor the financial performance of their business to ensure they don't fall into cash struggles down the track. Generally, businesses finances are measured using three different documents – a statement of income, cash flow and balances.
An income statement measures the profit and losses for your business over a specific period, while cash flow shows how much tangible money is at your disposal, not including assets. A balance sheet, on the other hand shows what you owe in debt, what is owed to you and where you're at in repayments. These three documents are a business owners holy trinity, and must be checked regularly to ensure you're well above water.
That being said, there are plenty of other financial KPIs to look at when breaking down the success of your business.
1. Forecasted cash flow
A cash flow forecast or projection measures the sales and profit of your company, and projects these values over a future period, usually one or two months ahead. This is generally calculated by adding the amount of money set aside in savings for your business (not including assets), then minus your estimated fixed and variable expenses, which may include rent, employee wages and insurance.
Keeping track of this value is vital in picking up on potential problems and planning tax obligations well before the end of the financial year. Furthermore, this aids in determining your margin, a percentage that allows you to directly measure the profitability of your business against previous years or efforts within your company and against competitors or businesses in similar markets. This value is easy to record, and means you can keep track of how your business is performing without having to trawl through months of financial data.
2. Revenue growth
For small businesses that have been open for more than a year, it's key to keep an eye on how the income of your business grows over time – not only to check what's stacking up in the bank, but whether your product or service is a feasible venture. To calculate the rate of your revenue growth, you first need to calculate the total revenue for your business (an expert accountant can help in finding this figure) and divide it by the total revenue for the year prior. This value helps in determining the rate of growth and whether you need to reassess your business or buying strategy to maximise profits.
3. Gross profit margin
One of the most important parts of managing a business's cash flow is ensuring that you're earning more money than you're spending on your business. A way of measuring this spend is by calculating your business's gross profit margin, found by dividing the gross profit amount by your sales, and multiplying it by 100 to determine the percentage. This is an excellent value to track as you can easily keep an eye on whether you're spending too much on business costs, such as supply – if your gross profit margin is decreasing, you may need to adjust operations or buying to compensate.
4. Accounts owing
Separate from your balance sheet is breaking down the accounts that are owed money form your business. The best way to find out whether your business is biting – or buying – off more than it can feasibly chew is by calculating the turnover of such debt. Simply add the total of purchases from your suppliers and divide it by the average number of accounts – this number indicates how much you're spending on your supply. This figure is incredibly telling, indicating whether you're pouring too much money into supply and whether you need to cut back the spending in certain areas.
At WMC Accounting, we understand the ins and outs of the business journey, from idea to expansion. For more information on our business finance services, reach out to our team today.