As accountants, we’re used to thinking in terms of quantifying successes rather than qualifying them. We like numbers, that’s why we got into this gig. But business owners get into business because they have great ideas, game-changing products or much-needed expertise to offer.
To help you out, we’ve created a three-part series on the numbers you need to be aware of. Undertaking an inventory of key performance indicators (KPIs) is an important step in truly assessing your company’s financial strength and sustainability. Moreover, those metrics become a roadmap for growth, help to define your goals, and can illuminate better strategies to reach the next levels of growth. While some of these percentages may seem familiar at first glance, other KPIs may benefit from your accounting team’s insight.
Our first post describes the financial metrics that all companies should be aware of.
For every company:
Many businesses set benchmarks for expense ratios and budgets—making sure they’re within reasonable limits, identifying costs when they aren’t. These KPIs offer a starting point for gauging your company’s operational health. If expenses are too high and that trend isn’t subsiding, it should signal a serious reconsideration of strategy. Ignoring something at this step could mean egregious problems down the line.
If your company can’t navigate reductions in sales or operates with poor ratios already, then this symptom deserves your attention. A company shouldn’t wait until it has large debts or insurmountable cash shortages to realize signs of ill health. There’s no escaping problems at this level.
KPIs for every company:
Gross Profit Margin: the proportion of money left over from revenues after accounting for the cost of goods sold. This amount is available to cover overhead & operational costs.
Breakeven Margin of Safety: the amount of sales that are above the breakeven point
Operating Profit as % of Revenue: the sales revenue less the cost of goods and operations, divided by total revenue generated
Owner Pay as % of Revenue (if owner operated): of total revenue generated, what proportion you’re allocating to yourself as salary
Operating Cash Flow: Cash generated by the operating activities of the business. Operating activities include the production, sales and delivery of the company’s product and/or services as well as collecting payment from its customers and making payment to its suppliers.
Number of Paying Customers: the number of customers who paid you for a given time period.
Average Sales per Customer: the average sales transaction amount per customer for a given time period.
Key Expenses as a % of Revenue (Marketing, Payroll, Software, Merchant Fees, Trade Show etc.): the ratio of ongoing costs generated from ordinary operations as a percentage of total revenue generated
Tax as % of Revenue: of total revenue generated, what proportion should be allocated for state and federal taxes
Accountfully has worked with companies of all types to identify pain points and thoughtfully re-orient companies on better paths to success. Giving business owners the resources to track existing KPIs is critical to the success of businesses large and small—and the economic eco-system surrounding them. With data in hand, you can make decisions on attainable objectives that represent success and sustainable growth.
Want to learn more about key performance indicators? Check out our Key Performance Indicator Guide: