Measuring the success of your business with financial KPIs

We see quite a varied approach by businesses when looking at how they measure their success. Different companies will take a different approach in terms of what they measure and the frequency with which they do it, but regardless of size, industry or where you are in your business life-cycle; there are some common Key Performance Indicators (KPIs) which all businesses should be measuring.

It’s also quite easy to focus on one or two KPIs in isolation and forget how that ties into the wider picture of your success. For example, if you are just tracking your income growth and gross profit margins, that’s not going to flag up pinch points in cash flow or how quickly you are turning over your stock. There are also non financial KPIs which should be considered, such as customer satisfaction and complaints.

For small owner managed businesses where owners find themselves tied up in the day-to-day running of the business, it’s quite understandable why their focus might just be on making sure compliance is adhered to at the year end. However, with a few simple changes to how you record, track and report your numbers, it’s amazing how much extra insight into the health of your business you can get.

Good use of KPIs within regular management information will help business owners and managers to improve profitability, take advantage of tax planning opportunities, help with profit extraction decisions, raise finance and keep stakeholders happy.

5 financial KPIs you should be using

1. Cash flow forecast – to help identify shortfalls/large surpluses and allow for planning around that

2. Gross profit margin – tracking the profits you are making before you deduct your overheads

3. Earnings Before Interest, Taxes, Depreciation & Amortisation (EBITDA) – focuses on underlying operational profitability, regardless of capital investment

4. Debtor days – the amount of time it takes you to collect the cash from your customers

5. Creditor days – the amount of time you are taking to pay your suppliers

The list of KPIs that can be used is vast, and deciding what else you may want to track will need careful consideration based on the specific type, size, structure and industry in which you operate. Most will be centered around growth, profitability, efficiency and liquidity and some are more complicated than others to calculate, so using software to do this is preferable.

Software on the market now is great at tracking KPIs for your business, and if you are using a cloud based software such as Xero, it makes it much easier to measure your success at anytime and from anywhere in the world!