Every business owner dreams of establishing a long-term income stream to sustain their business. However, that is a challenge for most, especially those who are just starting. There are a lot of tasks involved in the process of building cash flow. Most of the time, business owners fail to recognise the right tactics that will help their business reach its full potential.
One reason why this happens is the lack of time. But the most common reason is that these businesses lack the proper tools to measure their goals. Any entrepreneur who wishes success should set the right goals for their business. They should also have the right tools to track and measure their activities so that their goals are achieved.
A lot of businesses have the notion that the ultimate goal is reaching a particular “profit” or “revenue”. That is only a short-term goal.
What happens after you reach those figures? Do you just stop operating at that point? Anyone with a sound mind would say no. What a business owner should strive for is “sustained growth” that meets the metrics set by the company’s accountant. This actually allows easier measurement of success.
Setting your key performance indicators should be largely done with your accountant since they are the ones with the most knowledge on what your business really needs.
Before we discuss how you can establish your own financial KPIs, let us learn some of the most common financial KPIs that are applied by successful businesses.
Financial KPIs Your Business Should Consider
1. Net Profit
This refers to what is left of your total revenue after all expenses are subtracted. For example, if your total sales in a month reached $20,000 and the expenses, including utility bills, employee salaries, and other overhead costs amounted to $13,000, that means you have a net profit of $7,000.
Generally, all businesses should have positive net profits with the exception of non-profit organisations, For NPOs, there are other KPIs that can be used to measure success.
2. Net profit margin
This refers to the profits in percentage form after deducting all business expenses, including operating and non-operating ones. For example, if your business earned a revenue of $100,000 against a total expense of $70,000, your profit margin would be 30%.
Depending on the industry you are in, the normal percentage of net profit margin varies. Some industries are okay with low margins while some industries need higher ones to continue operating. This metric helps you understand what kind of profits you could be earning in the future and gives you an idea of whether you should cut expenses or not.
3. Gross profit margin
Unlike the net profit margin, this is only concerned with the cost of goods. For example, if you earned $200,000 and the cost of selling goods is $120,000, then your gross profit margin is 40%.
For this KPI, it is important that the margin is high enough to still have something to cover other expenses. Generally, your gross profit margin should be 10% or higher. If it is lower, then you need to create adjustments to lower your expenses.
There are a lot more KPIs that your business should look into but these are the three most crucial ones. The net profit, net profit margin, and gross profit margin should be included in every business’ KPI list to properly measure their success.
Establishing Your Own KPIs
The whole concept of KPIs is to gauge your business’s performance. This means that every department should get its own set of KPIs. Gathering the results altogether will give you an idea of how you can move forward as a business by thinking about smart strategies based on factual evidence.
Here are a few aspects in your business that need a smart set of KPI.
1. Cash Flow
We have already discussed some of the more specific KPIs under these earlier. Of course, your whole business is centered around earning money and you need to be properly measuring if you are really earning the right amount at a certain period of the year.
Your Cash Flow KPIs should be able to gauge how much cash flow you should have on a daily basis. It’s important because it decides whether your business can continue operating or you might need to have financial assistance along the way.
2. Lead Conversion
Many businesses fail to include this KPI but this is actually one of the most important factors you should be looking into. Lead conversion can indicate whether the activities done by your business can successfully convert leads into customers. From here you can measure the effectiveness of your marketing campaigns. If you are not converting enough leads, then you’ll need to create adjustments in your marketing strategies. Measuring this will help you eliminate the strategies that didn’t work and retain the ones that get you sales!
3. Employee Engagement
This last one might come as a surprise since this is not directly involved with the finances of your business. However, it is just as important as the others.
Your business might be financially capable of succeeding but without the people manoeuvring it in the right direction, it would still fail. It is important to check if your employees are still engaged in the business and if they are still happily working with you.
In reality, there are hundreds of KPIs that a business can apply to measure the success. It’s really just a matter of choosing the most accurate and necessary KPIs for the type of business that you own.
Establishing KPIs is taking a step toward ensuring that your business will not fail as soon as it started. Get together with everyone on your team now and start preparing for your own business KPIs for success!