Successful Small Businesses Track These 7 Financial KPIsWritten by Marya Sutimi on July 05, 2021
Tracking financial KPIs can be one of the biggest challenges for small businesses. However, knowing the right metrics can be the key indicator to success when you do them right.
Measuring the right Key Performance Indicators (KPIs) is essential to your business’s well-being.
KPIs are the metrics to measure your business performance and its alignment to your goals and objectives. Knowing the number can enlighten you with the progress and how well you perform based on the strategy implemented in your business.
By tracking your financial KPIs, you will understand the financial health of your business better to make critical adjustments in your strategy implementation when necessary. In addition, knowing and measuring the KPIs can help you drive results faster that enable you to achieve success sooner.
7 Financial KPIs That Small Businesses Should Track
You may think you need a handful of KPIs to track your company’s performance. However, it is important to measure a few KPIs in at least 4 different categories: Employees, Customers, Processes, and Finance.
Among others, there is no doubt that finance is an essential aspect of your business, if not the most. Financial management can help your business determine your revenue and expenses.
But beyond that, there are some necessary financial KPIs to monitor if you want to ensure the financial health of your small business moving forward.
Revenue is the backbone of your business. It is the amount of income you generate before subtracting any expenses. To know the number of your revenue, you can calculate it by adding up all of your earnings. This may include the profit you get from the sales you make and other factors, such as equity and interest.
Monitoring the revenue can help you get the exact gross income for your business. By knowing the number, it will help you set realistic goals for your team. At the same time, it will also allow you to calculate the revenue growth rate.
The revenue growth rate will provide some insights into how your business has been growing over time. In addition to that, recognizing your revenue growth rate will be useful to set the target for the next financial period.
Expenses are inevitable when you run a business. It is the costs that you need to spend to ensure that your company still operates and earns revenue. To track the expenses in your business, you can split it into two categories: operating and non-operating expenses.
Operating expense is an expenditure that your business incurs through your operations. This includes rent, equipment, insurance, payroll, marketing, and any costs allocated for research and development. Meanwhile, non-operating expense covers the expenditure that is not related to your business’s core operations. The latter may include the loss on the sale of your business assets or the cost of currency change.
By monitoring your expenses, you can be more cautious about your spending and be more prepared when you need to adjust your expenditures. Knowing the number will also help you get the result for your net income.
The challenge of running small businesses is that you need to bring in enough revenue to cover their expenses. Otherwise, the risks from crippling debts to your business become obsolete can be the worst-case scenario.
3. Cash Flow
Cash is king for a small business. It is the bread and butter for your business, as you rely on the money to pay for your operational expenses. Some may think that revenue and cash flow are the same, but they aren’t.
While revenue is usually monitored regardless of the payment method for the sales, cash flow is only tracked when you receive the payment to your account.
As a small business owner, you want your business to have a positive cash flow where the money coming in exceeds the amount of money that goes out of your account. To anticipate the possibility of having a negative result, you can also start performing regular cash flow forecasts.
Outlining your cash flow forecast can identify the possible obstacles in the early stages. By monitoring the number, you can also make some adjustments to avoid any shortage in your future finance when necessary.
4. Budget and Actual Expenditures
Now that you track your expenses from time to time, it also helps to compare your budget and actual expenditures for your business. Comparing them allows you to define what to expect to spend over the next fiscal period.
Outlining the budget for expenses can help you stick with the amount of money you spend. Meanwhile, tracking your actual expenditures is also essential to identify your budget variance.
Budget variance is the gap between the budgeted amount you have for a specific category and the actual money you spend for it. This may result a budget surplus or deficit in your spending, which can be caused by the following:
- An error in the static budget
- A change in the business climate or manufacturing costs
- The inaccurate expectation in sales forecasting
While it is possible to spend less than your budget on the actual expenditures, you’ll most likely spend more than you plan. It will come in handy to know how feasible it is to cover your expenses when it happens.
5. Break-Even Point
A break-even point is a situation when your revenue can finally cover your expenses. Recognizing your break-even point will help you structurize your pricing and other essential functions of your business operations.
It is an important benchmark for your business plan in the long term. A break-even point occurs when your total revenue is aligned to the total costs or expenses you’ve spent for your business.
Knowing the break-even point for your business can help you decide on various strategies for your business. From a marketing perspective, calculating it will enable you to determine whether a sale or discount is feasible for your product.
Or better yet, you can also restrategize your business plan by analyzing your break-even point.
6. Profit Margin Ratio
As a small business owner, you may strive for a higher profit margin ratio, which means your profit will exceed the money you spend on operational costs. Knowing your profit margin ratio is also effective in getting some insights into how well you can generate and retain the cash flow for your business.
The profit margin ratio provides a measurement of how much profits are generated from your sales. The metrics can also be beneficial when you start scaling, as they can give you some profound insights into management efficiency in your business.
7. Cash Runway
The cash runway term refers to the approximate time of a company until they run out of cash. It can be calculated by the money they have and their monthly expenses. By identifying your cash runway, you will get more insights into your profitability and your spending habit as a business.
There are at least three different types of cash that you can consider when you track your cash runway, which include:
- Company cash: The cash flow used for the business operation.
- Team cash: The money used to pay employees’ salaries.
- Founder cash: The founder’s personal cash that may be used as a last resort if the business goes under.
Most businesses will strictly use company cash to calculate their cash flow, although these three types of cash can be the alternative formula when calculating your business cash runway.
How InvoiceBerry Can Help Tracking Financial KPIs For Small Businesses
Monitoring your revenue and expenses is essential to your business’s financial KPIs. InvoiceBerry is an excellent tool to track them so you can focus more on KPIs in other categories.
Here are how InvoiceBerry can help you save time and money to track your financial KPIs.
1. Scheduling Automatic Invoices For Your Regular Customers
You don’t need to worry about forgetting to send your recurring invoices anymore, as InvoiceBerry can do it in automation.
Apart from customizing and sending your invoice at a fixed date, InvoiceBerry also comes with a reminder feature to ensure your clients pay you on time.
In addition to that, InvoiceBerry also enables you to convert your quotation into an automatic invoice once you reach an agreement for a new customer.
2. Tracking Your Expenses Overview
Budgeting is one of the most essential entities in your business’s financial KPIs, and that’s why InvoiceBerry comes with an expense page to track and calculate your expenditures.
You can easily create a new category, whether for suppliers or other expenses, to monitor where you spend your money and how to budget adequately for the next fiscal year.
3. Providing Reliable and Appropriate Financial Reports
Whether you want to monitor your cash flow or evaluate your monthly expenses, InvoiceBerry comes with a report page that enables you to review your financial records.
The report feature also allows you to export the files into Excel or PDF if you need to share them with your team or financial consultant.
It doesn’t matter whether it’s just an early stage of your small business; your success will rely on how you generate revenue and manage your finance. Monitoring the financial KPIs of your business can be one way to assess the viability of your business.
Using the right KPIs and tracking the number to analyze how you can restrategize moving forward will help your business deliver better results to achieve success.