Assess Business Growth by Tracking Key Performance Indicators (KPIs)
Key takeaways:
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Learn when you should focus on increasing revenue or tightening budgets with cash flow ratios
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Leverage current ratios and debt-to-equity ratios when trying to obtain financing
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Look at budget variance KPIs to assess how well your business sticks to budgets and help you identify areas for change
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Find out how much of your revenue is profit by tracking your gross profit margins
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Track the rate of organizational growth with revenue growth rates
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Use relative market share KPIs to see how you measure up to the competition
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Get help tracking KPIs from Franco Blueprint
Key Performance Indicators (KPIs) help you measure and track essential financial details about your business’s performance. Tracking accounting KPIs gives you the information you need to make effective business decisions, attract investors, and obtain loans. Unfortunately, many business owners don’t track the right KPIs.
They may track a few basic KPIs, they may get into a rut of not tracking any KPIs, or they may not even know what a KPI is. You are not alone if any of these situations apply to you. However, if you want your business to be successful, you need to understand the importance of tracking accounting KPIs. This article looks at a few different KPIs to get you started and understand the importance of hiring an accounting professional to help.
Where to begin
It’s good to know what KPIs you should track to better understand what they mean and why you need to monitor them. Here are some of the most important KPIs.
Cash flow ratio
Cash flow ratios show you how many times you can pay off your current liabilities based on your operating cash flow. A ratio of over one indicates that your cash flow exceeds your current liabilities, while a ratio of less than one means your business is struggling to stay on top of its bills and indicates the need for change.
Debt-to-equity ratio
This KPI is also a useful indicator of a company’s financial health. It helps you compare your organization’s debts to its assets. A high debt-to-equity ratio means that a business relies heavily on debt. On the other hand, an overly low ratio means that the business is not leveraging its ability to use debt adequately. You can calculate this ratio by dividing total liabilities by total shareholder equity and use it to guide you toward effective financing decisions.
Current Ratio
A current ratio refers to your total assets divided by your liabilities, and it shows how solvent your business is. Tracking accounting KPIs like this one is essential if you’re trying to obtain financing. A strong current ratio can help attract investors or get loan approvals.
Budget variance KPI
You need to make sure that you’re not routinely going over budget if you want your business to stay on track financially. Tracking accounting KPIs like the budget variance KPI helps you see how well your business does in relation to sticking to budgets. Variances can help you see where you need to modify your budgets and guide you toward a more accurate budgeting process.
Gross Profit Margin
Tracking accounting KPIs helps compare current performance to past performance. The gross margin KPI also helps you compare the relative profitability of different products, different locations, or other variables. Gross profit margin is gross profit divided by sales or revenue, and this number shows you how much of your revenue is profit. A gross profit margin of 0.5, for example, indicates that 50% or half of your revenue is profit.
Revenue growth rate
You can easily see when your business is earning more or less profit. Ideally, you should dig deeper and assess exactly how quickly your business is growing by looking at its revenue growth rate. Start with your total revenue from one period of time, subtract the total revenue from a previous period. Then, divide the difference by the original revenue number. Imagine your revenue for March is $10,000 and for April it is $12,000. Your revenue grew by $2,000, and when you divide this number by March’s revenue, you have a growth rate of 20%.
Now, say your revenue grows to $14,000 in May. This number indicates that your business has had another $2,000 jump in revenue. However, when you calculate the revenue growth rate, you get a rate of 16.7%. This means that your revenue has not grown as quickly during this time period as the previous one, and you may want to take some time to figure out why.
Relative market share
Most of the KPIs discussed above are internal numbers, but business is not just internal. You also have to consider tracking accounting KPIs that help you assess your performance in the marketplace. Relative market, in particular, shows you how much business your company is getting compared to other businesses in your industry.
Say you own a restaurant, for example — to find your market share, you need to know how much people in your area are spending on eating out. Then, you can divide your revenue by this number. Imagine your restaurant earns $100,000 in revenue, and people in your town spend $1 million per year on eating out. This means you have 10% of the market share. Ideally, you should look at this number regularly to see how you’re faring compared to your competitors and to ensure you’re not losing any of your market shares.
Getting help from a professional
These are just a few of the potential KPIs you may want to track. The best practices for tracking accounting KPIs vary based on your business and your unique financial goals. Do you know what KPIs you should be tracking? Franco Blueprint can help guide you in the right direction.
We work closely with our clients to customize financial services for their needs. Find out what KPIs you should be tracking for your company by contacting us today.