Last editedMar 20222 min read
Financial KPIs are vital to driving strategy for small businesses as they provide a clear understanding of your current financial position, helping you plan your next steps smartly.
In this post we’ll outline the 5 most important financial KPIs to help you strategize like a true CEO.
What are financial KPIs?
KPI stands for key performance indicator and, in accounting, is a measure of financial outcomes, including revenue, profits and expenses. It’s a means of reviewing a company’s finances according to different metrics and segments. Common examples of top financial KPIs include cash flow and net profit margin.
5 most important financial KPIs for small businesses
Now that we’ve defined what we mean by financial KPIs, let’s dive into a list of crucial financial KPIS for small businesses.
Revenue growth
Revenue growth is one of the most basic and important measurements of success in any business. It refers to an increase in revenue over a certain period of time and is expressed as a percentage. In accounting, it is the rate of increase in total revenues divided by the total revenues from the same exact period the previous year.
Revenue growth should always be in the positive, and negative growth is an indicator that something is going wrong.
2. Revenue stream analysis
It’s also advisable that you analyze your various streams of revenue, for example revenue per client or per service. This will help you understand which customer segments bring in the most revenue, as well as which goods or services are your largest sources of revenue. Knowing this information is valuable to strategizing your marketing technique as you understand your target audience better, and which products or services are most appealing to customers. This will help you to capitalize on them.
3. Revenue concentration
Linked to revenue stream analysis, is revenue concentration. This is a measurement of how total revenue is distributed among your customer base. If you find that one or two customers account for a large portion of your total revenue, then you need to act to diversify your customer portfolio. Generally speaking, if one customer accounts for 10 or more percent of your total revenue, then you have a high customer concentration. This requires action on your part to attract more customers because your income is reliant on too few, and, should you lose them, you’ll be in a very difficult financial situation.
4. Profitability over time
Another top financial KPI for business strategy is profitability over time. This involves looking at expenses proportional to income in order to compile profit and loss reports. This will give you a clear indicator of your business performance over a given period. This will influence important decisions such as whether or not you should cut costs, and if so, which costs should be cut. It will also raise questions about how to increase your net profit margin and whether or not you need to pull in more customers to see the kind of profits you’re aspiring to.
5. Working capital
Working capital refers to the amount of easily available cash and liquid investments that a business has to pay for day-to-day business operations. It is equal to the total of a company’s assets minus its liabilities. It can be calculated using the following formula:
Working Capital = Current Assets - Current Liabilities
Current assets refer to either cash or other assets which can be easily liquidated, while current liabilities refer to debts due within one year. If current liabilities exceed that of current assets, then a company has a working capital deficit. If current assets exceed current liabilities, on the other hand, then a company has a positive working capital. Naturally, the goal is to aim for the latter.
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