Your profit and loss statement may be looking good, but is there a bigger story behind your balance sheet? Don't let yellow lights become blaring sirens. Instead, proactively track these five small business KPIs consistently. Doing so will help keep your company financially healthy for the long haul.
KPI #1: Cash flow forecast
Total Cash in Bank + Projected Cash in (Next 4 Weeks)
Projected Cash out (Next 4 Weeks)
This calculation will include the sales forecast, which is a primary indicator of how your business is trending. Equally important is your margin. All the sales in the world won’t matter if the margin isn’t big enough. The cash flow forecast will tell you if your sales and margins are where they should be.
At a minimum, you should calculate your cash flow forecast monthly. A weekly calculation is ideal, though, especially if your business is growing or is in a state of flux. The calculation is simple: total cash in the bank plus projected cash coming in over the next four weeks, less projected cash going out over the next four weeks.
Cash shortfalls are stressful and expensive. Performing a cash flow forecast is a simple way to recognize potential shortfalls early so that you can take the necessary steps to avoid them.
KPI #2: Debtor days outstanding
Annual Accounts Receivable / Annual Sales x 365
This KPI tells you how long it takes your customers to pay up, on average. A decrease means your customers are paying faster, while an increase will negatively affect the cash flow forecast. Increases may also indicate larger problems with collections and can hamper your ability to stay current with creditors.
To calculate, take your annual accounts receivable and divide it by your annual sales (these numbers will come from the same period). Then, multiply this number by 365 (adjust if the number of days in your financial year is different).
It’s also important to know how you stack up within your industry. For example, average debtor days may be higher in the tech vertical than it is in the professional services vertical. The right expense management solution can provide business intelligence reporting that allows for timely, accurate KPI measurement, while also providing the critical comparison data needed for industry benchmarking.
KPI #3: Creditor days outstanding
Annual Accounts Payable / Annual Purchases x 365
This KPI tells you how long it takes you to pay up, on average. To calculate, simply take your annual accounts payable and divide it by your annual purchases, then multiply the result by the number of days in your financial year.
You’ll want to compare this side-by-side with debtor days because it’s important that, in order to avoid cash flow issues, your creditor days are equal to or higher than debtor days. Paying creditors too fast while money from debtors slowly trickles in can crush a small business. If creditor days are lower than debtor days, consider either re-working your customers’ payment terms or negotiating more favorable terms with suppliers.
KPI #4: Gross profit margin as a percentage of sales
(Gross Profit/Sales x 100) / Sales
This KPI will allow you to compare the price you charge customers versus the prices you pay suppliers. To calculate, first figure out your gross profit margin (gross profit divided by sales*100). Next, simply divide your gross profit margin by sales to get your percentage.
An increase is good as it means you are keeping more of the money you take in. If this percentage decreases, you may need to correct it by increasing prices or reducing overhead.
KPI #5: Profit before income tax as a percentage of sales
Gross Profit Before Income Tax / Sales
You’ll want to monitor this KPI because a decrease can alert you to potential future losses. The calculation is in the title: Divide your gross profit before income tax by your total sales. No change to this percentage can be acceptable for a while, though ideally you want a gradual increase over time.
Whether you use these small business KPIs or you create custom KPIs, creating a business intelligence reporting process and adjusting when necessary is essential to your businesses’ health. Using expense management software can help you monitor financial health with accuracy, efficiency and added wisdom.
Finally, don’t hide these numbers in the corner office. Sharing vital KPIs with the broader team gets everyone to take ownership, and can help spur ideas and innovation that will have your small business KPIs looking even better.