Growing Your Business

Is Your Small Business Healthy? 6 KPIs to Watch

Is Your Small Business Healthy? 6 KPIs to Watch

Key Performance Indicators (KPIs) are metrics for your business that signify how your company is functioning. These various financial tools paint a picture of the overall health of your small business. If one or more areas are dropping or seem to be a problem, that could signify a larger (and potentially long-term) issue that you need to address.

Understanding these KPIs will help you anticipate the impact that they will have on your company. Once you can recognize patterns, you can make changes before they start to have a negative impact on your business as a whole — and on your bottom line.

1. Various Profit Measurements

This KPI is so obvious that it is often glossed over in formal literature, but it is worth mentioning, particularly for smaller business owners who may not formally track their sales and expenses consistently.

Your revenue numbers are going to be the best indicator of whether your company will remain viable for years to come. If you cannot keep your expenses down and your income up, your company will not last long. Some basic, need-to-know profit metrics include:

  • Gross Profit Margin: (Revenue – cost of goods sold) / revenue. This percentage tells you how much you are making over and above the cost of actually producing the product or providing a service. It is a good practice to aim for at least 10%.
  • Net Profit: Total revenue – total expenses. Net profit tells you how much of your income is being taken up by expenses in terms of dollars and cents.
  • Net Profit Margin: (total revenue – total expenses) / total revenue. Rather than just looking at what goes into your product or service, the net profit margin also examinese your overall revenue in comparison to your overall expenses.

Income makes everything else run effectively — without income, your business will not function well. However, you need to consider other, more intricate measures to get a real feel for your business's overall health.

2. Operating Cash Flow

You can only effectively pay expenses if you can keep enough cash in the drawers to address them. Although you can operate in the red for a time if necessary to keep afloat from month to month, having sufficient cash flow will enable you to move your company forward, rather than addressing last month's expenses with this month's money.

Determining whether you have sufficient cash flow to support capital investments will tell you a lot about the overall financial health of your company.

3. Accounts Receivable Aging

When you offer credit terms to your customers, you have to wait for payment on those terms. This is true even if you do not deliberately offer credit — such as using a net-30 payment requirement on your invoices. Accounts receivable aging tells you how long it is taking your customers to pay their bills from the time that they are due or sent, depending on your accounting practices.

If you wait too long for payment, the negative impact on your cash flow can reduce or even eliminate the total profit on a particular project. As an entrepreneur or startup, keeping your customers current can be daunting, but it is necessary.

4. Accounts Payable Aging

This metric is the complete opposite of accounts receiving aging — it tracks how long it is taking you to pay back your obligations to others. Accounts payable aging can include virtually any bill, from utility or rent payments to inventory obligations. If it is taking you longer to pay these invoices, that can signify a cash flow problem that you may need to address.

Keep an eye out for vendors or other companies that offer you discounts for paying quickly. These discounts can add up over time and certainly help you cut down on expenses.

5. Quick Ratio

Your “Quick Ratio” is calculated using this formula: (current assets – inventories) / current liabilities. This information tells you about the company's immediate liquidity. It will let you know how much cash you have on hand. It addresses how likely it is that you will be able to keep up with your cash flow obligations at any given time.

6. Debt-to-Equity Ratio

Your debt-to-equity ratio tells you how much debt you have overall compared to the total equity that you have in your company, including all of your assets. This ratio will give you an indication of how well you are using your investments and how well your company is funding its own growth. It tells you profitability as well.

A high debt-to-equity ratio shows that you are accumulating debt and that you are likely paying ongoing expenses with debt. If this ratio creeps too high, it can signal that your company is heading for trouble with cash flow problems as it takes additional funds to service your debt.

Is Your Business Healthy?

Entrepreneurial instincts are important, but you should not rely on those alone when it comes to your business finances. These external metrics will give you a better idea of the state of your company's health at any given them. Keeping close tabs on these various numbers will help you spot and address potential issues long before they become problems that affect your bottom line.

Frank Jenkins, CPA writes for CountingWorks, an accounting news and advice website. Reach him at [email protected].

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Frank Jenkins Jr

Frank Jenkins Jr

Frank Jenkins Jr. is the managing partner of Adams, Jenkins & Cheatham, a CPA practice based in Midlothian, VA. Frank specializes in Consulting services, tax planning, accounting, audit & assurances. "I genuinely care about our clients because I have a personal connection with them. This job requires me to multi-task and work under tight deadlines. I get great professional satisfaction from balancing firm and client commitments while building a strong team here at AJC."

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