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If you own a business, then you know it’s an exciting venture, but can often be overwhelming at times. When focusing on operations and logistics, financials can easily become overlooked. Fortunately, you can gain quick insights on the health of your business by tracking the key performance indicators listed in the rest of this article!
1. Inventory Turnover
This equation will tell you how quickly you sell your inventory or how quickly you turn it over. This means that having a higher inventory turnover ratio is a result of quickly selling products. You can calculate inventory turnover with this formula:
[Sales / Average Inventory] = Inventory Turnover
2. Accounts Payable Turnover
The purpose of this ratio is to see how quickly a business pays off debt owed to vendors and suppliers. This is a good formula to see how your business handles shorter term debts and if you’re making enough money to pay vendors. This ratio is found by using this formula:
[Purchases from Suppliers & Vendors / ((Accounts Payable Beginning + Accounts Payable Ending) / 2)] = Accounts Payable Turnover
3. Cash Flow
Cash flow is probably one of the most important KPIs to keep track of. This is because it keeps track of the flow of money going both in and out of the business. Calculating cash flow requires breaking up business activities into three categories – operating, investing, and financing activities.
Operating activities are the expenses required to keep the business running. Things like rent, labor cost, and material costs are all operating expenses. Investing activities are, quite literally, expenses resulting from investments. Purchasing any equipment, land, or company vehicles all count as investing expenses (make sure you’re buying equipment at the end of the year to maximize depreciation deductions). Financing activities are transactions required to finance a business. These would include loans, issuing stock, and paying dividends.
Once you know how much cash flow you’re generating from each activity, calculating total cash flow is simple. Combine them all together, and add the sum to your beginning cash balance to find your ending cash balance.
4. Revenue Growth Rate
Simply knowing that you’re making revenue isn’t enough. It’s also important to understand how quickly your revenue totals grow to see if your business is growing or stagnating. You can figure out how quickly your revenue grows within a specific time frame using this formula:
[((Ending Revenue – Beginning Revenue) – Beginning Revenue) x 100] = Revenue Growth Rate
5. Gross Margin
If you’re interested in knowing how profitable a specific product is, gross margin is an excellent way of doing so. Gross margin shows how much profit is left from revenue after deducting the cost of creating the product. This will tell you exactly how much money you make on each product, per sale. To calculate gross margin, use this formula:
[Total Sales – Cost of Goods Sold] = Gross Margin
6. Current & Quick Ratios
Sometimes you need a simple ratio to give you a glimpse into the financial health of your business without diving into specifics. Fortunately, there are two easy ratios you can use, the quick and current ratio. Both ratios show how liquid a business is, but the quick ratio is a more conservative approach. Use these formulas to figure out quick financial health ratios for your business:
[(Cash + Accounts Receivable + Marketable Securities) / Current Liabilities] = Quick Ratio
[Current Assets / Current Liabilities] = Current Ratio
7. Customer Satisfaction
Even though customer satisfaction isn’t directly financially related, having a higher customer satisfaction is certainly valuable. If your customers are satisfied, it means you’re doing a good job. There isn’t a specific formula for this, but you can look at things like sales, reviews, and survey results. If you don’t have any KPIs for customer satisfaction, you should make some so you can be better attuned to your customer, allowing you to operate better.
8. Customer Lifetime Value
This is another intangible KPI, but its impact is definitely financial. The customer lifetime value is the average value of each customer to your business. This equation takes into account the average value of purchases from a customer, how often they buy, and how long they stay a customer. This will let you know just how important each customer is. Calculate it using this formula:
[(Average Sale Value x Average Rate of Purchase) x Length of Customer Lifetime] = Customer Lifetime Value
9. Cost to Acquire Customer
Yet another intangible, this figure will tell you how much it will cost you to acquire each new customer. This isn’t a number you’ll pay at any specific time, but rather the average cost for everything associated with acquiring them. To find this value, use the formula below:
[Marketing Expenses / New Customers] = Cost to Acquire Customer
10. Customer Retention Rate
The final KPI on this list is yet another intangible – can you see how important these are yet? This percentage tells you how many of your customers you keep across a period of time. This tells you if your customer base is shrinking or growing over time. Here’s how you can calculate it:
[((Ending Customer Number – New Customers Acquired) / Beginning Customer Number) x 100] = Customer Retention Rate
Find KPI Experts
When it comes to your business, there are truly an unlimited amount of key performance indicators you could look at. If you’re feeling overwhelmed, take some comfort in the fact that there are highly qualified professionals capable of helping you decide on KPIs and also help you determine the values for those.
Some businesses may view professional accounting services as expensive and unnecessary, but that’s just a common myth. Often times, businesses without professional accountants often miss important deductions and end up costing themselves extra money. Hiring a pro to carefully comb through your books is the best way to make sure you’re saving every dime. Most likely, your accountant will even save you more than they cost!
If you’re interested in growing your business and listening to it’s pulse, you need quality key performance indicators in place. Having an easily identifiable figure can give you quick insights into the operations of your business, allowing you to make more informed decisions. Or you can always let a professional do it for you. After all, they do have the training and experience to do it right the first time, saving you all the hassle!