Are you keeping accurate tabs on your business’s performance? These 7 financial KPIs will help!
- Financial KPIs help you understand how the business is performing and what to focus on now and in the future
- 7 important financial KPIs:
- Net profit
- Net profit margin
- Average customer acquisition cost
- Working capital and current ratio
- Operating cash flow
- Budget vs. actual
- Acid test ratio/quick ratio
Knowledge is power, and in the world of business, this means having a firm grasp on the financials. You need to know if your business is profitable and where it can improve. Financial reports should work together to provide an accurate picture of past, present, and future performance. Only then can you understand which tactics are working and which aren’t, and where you should be placing more attention.
Key performance indicators (KPIs) give you this information. A financial KPI is a metric that illustrates if you are hitting specific goals and objectives. Here’s a guide to why they matter and seven KPIs to master:
Why are financial KPIs important?
Some people may assume there’s not much to measure when a business is doing well, as long as the cash keeps coming in. But without knowing the facts, you won’t know what’s causing success, how long it may last, and how to deal with downward trends when they do happen.
Financial KPIs measure and track successes and failures and allow you to see an actual performance number versus the objectives. Goals and benchmarks vary by industry and business, so each organization’s KPIs may be a bit different—and there may be more of them that are relevant. But here are seven financial KPIs most businesses should monitor:
1. Net profit
Also known as net income, net profit is how much cash you have after paying all business expenses. This is a basic but crucial KPI because it reveals the true profitability of the organization, going beyond straight revenue. To find net profit, simply subtract total expenses from total revenue.
2. Net profit margin
Once you know your net profit, you can move on to the net profit margin. Divide net profit by total revenue to get the percentage of income that ended up being profit. For example, if you earned $500,000 in revenue, but business expenses equal $400,000, your net profit would be $100,000. The net profit margin is $100,000 / $500,000 = 20%. (This number varies by industry, but 20% is generally considered a high net profit margin.)
Net profit margin helps you set goals for future profits and understand what the benchmarks should be.
3. Average customer acquisition cost
A valuable insight is understanding how much you spend to get a new customer. This is referred to as the average customer acquisition cost. First, add up every expense required to get a customer, including sales and marketing costs. Then divide that spend by the number of new customers acquired in the period being measured. The goal, of course, is to lower this benchmark.
4. Working capital and current ratio
When assessing available liquidity—for example, making sure you can cover an immediate expense—you need to know the working capital. This number reflects liabilities minus current assets. Liabilities include debt payments, accounts payable, and payroll, and assets are accounts receivable and cash. Working capital tells you how much is on hand in the short term. To find the current working capital ratio, divide current assets by current liabilities.
5. Operating cash flow
Healthy cash flow is a must for small businesses. It assesses money coming in and going out over a specific period. Positive cash flow is more income than expenses, and negative is when what’s going out is more than what’s coming in—an alarming scenario that calls for quick action.
The operating cash flow is a subset of that—the cash brought in through normal operations. It tells you the success of your primary business activities and helps determine whether or not you can generate enough positive cash flow to keep growing or maintain operations. It is essentially the “cash impact of a company’s net income from its primary business activities,” as Investopedia puts it.
6. Budget vs. actual
Creating a business budget is usually time-intensive, so make sure it’s working by performing a budget vs. actual comparison. This measure compares what you’re actually spending or earning with what you’ve outlined in the budget. “Budget variance analysis” is another term for this process. It helps a planner determine where the business is overspending and what areas need to be modified.
7. Acid test ratio/quick ratio
Finally, the quick ratio or acid test ratio tells you whether you can pay short-term liabilities. To find this number, first, subtract inventories from current assets. Then, divide that number by the current liabilities. This quick ratio helps determine immediate liquidity, or how much cash you have on hand right now to meet your needs.
Setting up a plan with financial experts
Measuring these financial KPIs is only one piece to the puzzle of running a business. For example, you may not know how to put the right procedures in place to track them or generate the reports you need. Further, the best businesses have dedicated processes and aligned team members, and they take a systemic approach to achieve objectives.
Provident CPA and Business Advisors is ready to help you set and meet your goals, putting your business on the path to stability and growth. We also ensure you’re never paying too much in taxes with our expert tax planning services.
Reach out to the team at Provident CPA and Business Advisors to learn more.