Small Business Financial KPI’s

Small Business Financial KPI’s

Did you know 82% of small businesses fail due to cash flow problems? This staggering statistic highlights the importance of financial management in the survival and growth of small businesses. Regardless of the industry, understanding and monitoring Financial Key Performance Indicators (KPIs) is crucial for owners and management teams to maintain financial health and make informed decisions.

What are financial KPIs?

Financial KPIs, or key performance indicators, are metrics organizations use to evaluate and measure their financial performance. These indicators focus on various aspects of financial health, such as profitability, liquidity, efficiency, solvency, and valuation. They provide insights into critical relationships derived from accounting data and help organizations make informed decisions, drive strategic decision-making, and monitor financial success. 

How Can KPIs Help Small Businesses Achieve Growth Goals?

KPIs play a crucial role in helping small businesses achieve their growth goals. Small businesses can gain insights and make data-driven decisions to drive growth by tracking and analyzing specific metrics. Here are some ways that KPIs can support small businesses in achieving their growth goals:

Measure Progress

KPIs provide a clear and measurable way to track progress towards growth goals. By setting specific KPIs related to sales, revenue, customer acquisition, or other key focus areas, small businesses can monitor their performance and make necessary adjustments to stay on track.

Identify Areas for Improvement

KPIs help small businesses identify areas of their operations that may need improvement to achieve growth. By measuring key metrics such as customer acquisition cost, customer retention rate, or conversion rate, businesses can identify where they need to focus their efforts and make necessary improvements.

Focus Resources 

KPIs help small businesses allocate their resources effectively. By understanding which metrics impact their growth goals, businesses can prioritize their efforts and allocate resources where they will have the most significant impact.

Foster Accountability

KPIs provide a way to hold teams and individuals accountable for achieving growth goals. By setting performance targets and regularly reviewing progress against them, businesses can motivate their employees and ensure everyone is working towards a common goal.

Make Informed Decisions

KPIs provide small businesses valuable insights and data to inform their decision-making process. By analyzing trends and patterns in their KPI data, businesses can make informed decisions about marketing strategies, product offerings, pricing strategies, or other areas that impact growth.

5 Financial KPIs for Small Businesses

1. Z-Score

This isn’t just for statistics! The Z-Score is a powerful predictor of financial distress and bankruptcy risk. It combines five financial ratios and provides a comprehensive picture of your financial stability.

2. Net Working Capital (NWC)

Liquidity is king in business. NWC helps you understand whether you have enough assets to cover short-term liabilities. Ensuring you can meet your obligations and seize opportunities without delay is crucial.

3. Free Cash Flow (FCF)

Cash is the lifeblood of any business. FCF measures how much cash a company generates after accounting for capital expenditures. It indicates your business’s ability to generate cash and grow sustainably.

4. Debt Service Coverage Ratio (DSCR)

This metric is essential for businesses with debt. It measures your company’s ability to service its debt with its net operating income. Lenders often require a healthy DSCR, a sign of a financially stable company.

5. Net Profitability

This KPI shows the bottom line – how much profit you’re making. It’s the ultimate measure of your business’s financial success, showing the real profit margins after all expenses are accounted for.

6. Cash Burn Rate

This metric is critical for startups and growth-phase companies. It measures the rate at which a company consumes its cash reserves before generating positive cash flows. It’s a key indicator of runway and sustainability, highlighting how long you can operate before needing additional funding or reaching profitability.

By closely monitoring these KPIs, businesses can make informed decisions, anticipate challenges, and capitalize on opportunities. Understanding your numbers is critical to unlocking your business’s full potential!

Keys to Success When Managing Cash Flow Crunches 

Cash Flow Forecasting Models.

We like the “13-week” and a “line-by-line rolling 30 days” paired together. This helps look out for a quarter while managing an actual plan in the short term daily on the payable and receivable sides. Regularly conducting expense reviews is necessary to keep models current.

Short-Term Revenue Forecasting.

In liquidity crunches, tracking the daily sales booked and daily cash/credit card receipts is very important. Accordingly, forecasting revenue each week is a best practice to manage your short runway to meet payroll and other current liabilities.

Be Wise About Deploying Debt.

Managing the business through free cash flow is essential to avoid high-interest debt. Seasoned businesses have access to more credit facilities, but small businesses can have limited financing options during seasonal cash flow crunches. The better path is modifying operations and schedules, reducing expenses, and running lean until your busy time.

Shorten the Cash Conversion Cycle (CCC).

Extending your payables and decreasing your receivables is a solid recipe for increasing cash flow. A good idea is to prioritize your payables to ensure you do not experience operational constraints. If your company holds inventory, finding ways to move stagnant products can provide additional sources of in-flows.

Dealing with cash flow shortages is painful for a business owner. Having a plan to manage your cash can help offset the difficulties of seasonal business cycles. Regularly reviewing and adjusting these strategies based on actual cash flow patterns is crucial to ensure the business remains financially healthy and agile in responding to changes in its operating environment.

Comprehensive List of Financial KPIs

  1. Revenue Growth Rate: Measures the rate at which a company’s sales increase over time.
  2. Net Profit Margin: This shows the percentage of revenue that remains as profit after all expenses are deducted.
  3. Gross Profit Margin: Indicates the percentage of revenue that exceeds the cost of goods sold.
  4. Operating Profit Margin: The percentage of revenue left after deducting operating expenses.
  5. EBITDA Margin (Earnings Before Interest, Taxes, Depreciation, and Amortization): A company’s operating performance measure.
  6. Return on Equity (ROE): Measures a company’s profitability in relation to its equity.
  7. Return on Assets (ROA): Indicates how efficiently a company uses its assets to generate profits.
  8. Debt-to-Equity Ratio: Compares a company’s total liabilities to its shareholder equity.
  9. Current Ratio: Assesses a company’s ability to pay its short-term obligations with its short-term assets.
  10. Quick Ratio (Acid Test): Measures a company’s ability to cover its short-term liabilities with its most liquid assets.
  11. Inventory Turnover: This shows how many times a company’s inventory is sold and replaced.
  12. Accounts Receivable Turnover: Indicates how efficiently a company collects its receivables.
  13. Accounts Payable Turnover: Measures the rate at which a company pays off its suppliers.
  14. Operating Cash Flow: Cash generated by a company’s regular business operations.
  15. Free Cash Flow: The cash a company produces through its operations after subtracting the capital expenditures.
  16. Cash Conversion Cycle: Measures the time it takes for a company to convert its investments in inventory and other resources into cash flows from sales.
  17. Working Capital: The difference between a company’s current assets and current liabilities.
  18. Budget Variance: The difference between budgeted and actual figures for a particular accounting category.
  19. Cost of Customer Acquisition (CAC): The cost associated with convincing a customer to buy a product/service.
  20. Customer Lifetime Value (CLV): The total worth of a customer’s business over the whole relationship period.
  21. Break-Even Analysis: Determines when a business can cover all its expenses and begin to make a profit.
  22. Economic Value Added (EVA): A measure of a company’s financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit.
  23. Gross Revenue Retention (GRR): Measures the percentage of recurring revenue retained from existing customers over a given period.
  24. Net Promoter Score (NPS): Although not a financial metric per se, it measures customer satisfaction and loyalty, which can indirectly impact financial performance.
  25. Z-Score: A statistical measure quantifying the probability of a company going bankrupt. It factors in various financial ratios and metrics to assess a company’s financial health and stability.
  26. Debt Service Coverage Ratio (DSCR): This metric evaluates a company’s ability to generate enough cash flow to cover its debt payments. It’s calculated by dividing the company’s net operating income by its total debt service obligations.
  27. Cash Burn Rate: Often used by startups and growth-stage companies, this KPI measures the rate at which a company uses its cash reserves or balance. It’s crucial to understand how long a company can operate before securing additional financing or reaching profitability.
  28. Interest to Revenue Ratio: This ratio shows the proportion of revenue spent on paying interest. It’s calculated by dividing the interest expense by the total revenue. This KPI is particularly useful for businesses with significant debt, as it helps assess the impact of debt on the company’s revenues.

Contact Westport Financial today to begin developing financial KPIs for your small business!