Accounting KPI’s That Your Small Business Should Be Using
Running a small business can be a cumbersome task especially when you have a small team and endless amounts of general tasks to complete. How do you have time to focus on growth related tasks? These can often find themselves on the back burner, swapped out for more immediate activities, but they cannot be left behind for long if any business aims for growth. Luckily for small businesses there are a few key performance indicators (KPI’s) that will tell the owners everything they need to know about where their business is heading.
Key Performance Indicators are a measurable indicator that can help assess your business success, show the health of a business, progress towards its goals and help build strategies to achieve business goals.
They can help business owners measure and track important metrics without a windfall of data. They can also reveal where thin2605gs are not working well in order for them to be corrected.
How to Select The 22f0KPI’s To Monitor
There is a long list of KPI’s to choose from and the ones that a business selects are mainly based on the type of industry, business stage and its goals. Consider the following three things when selecting which indicators to include in your tracking:
1. Business Stage
At different stages of a business different indicators become more important. A business that has just started out may want to focus on sales information since this is the only way to keep the business running. Therefore, they might place their importance in the day’s sales outstanding metric in order to indicate how quickly they can turn receivables into cash. Alternatively, a more well established business might focus on employee retention in order to keep their knowledge capital in the business.
2. Business Objectives
he number one business goal is to turn a profit, but it is important that business owners focus on more than that in order to keep their business running in the long-term. There can be a range of goals that a business has and choosing a small group of main ones can help form objectives and allow for the formation of specific KPI metrics to monitor. The goals can be related to clients, employees, operations or marketing. For instance, a business goal might include increasing market share which in turn will lend to a focus on the execution of the marketing plan. Some KPI’s can and should be chosen based on company objectives.
3. Types of Indicators
It is best to measure both lagging and leading KPI’s. A lagging KPI is a historical measure which can tell you what has already happened and a leading KPI is one that is future looking and will help you predict what will happen. Profit is a lagging indicator; it will not tell you how much profit your business will continue to make. Whereas, client satisfaction is a leading indicator as a happy customer is bound to return and spend again.
KPI’s for Accounting in Small Businesses
1. Gross Profit
Profit is the main element of any business, and making sure that you are not overspending in parts of your value chain is important to maintaining a good profit level. This metric should be included because it will tell you how much profit a company is making based on how much it pays suppliers. If it is increasing, then continue on the same track, but if it is decreasing then you will have to reevaluate what costs can be reduced for example wages or cost of goods sold.
2. Flow In and Flow Out
Known as the most important KPI for a small business, flow in and flow out is also knows as the Cash Flow Forecast. It usually covers a period of 12 months and uses historical data to predict how the future months will perform. This is key for planning, whether that is related to production, sales, revenue generated or cash on hand required. This KPI will help business owners identify if their sales and margins appropriate or not.
3. Funnel Analysis
A funnel analysis enables you to see how your users move through the series of steps included in your sales funnel. You can track the amount of customers that left the funnel and can investigate why they might leave at a higher rate on a certain page on your website or at a certain point of your sales process.
For instance, after your first consultation call or price request. You can have as many or as little steps as you want included in your funnel and different funnels for difference products or services that you offer.
You can use this KPI to help you remedy any problems that you may be having with a particular step in your funnel in order to increase sales. This is an especially useful KPI if you have an online business.
4. Accounts Payable Rate
It is important to make sure that a company pays its suppliers on time and that there is the money to cover these costs. It can be a difficult task to cover all the costs that a business makes on a daily basis as well as to present costing data that is error free, especially for a small usiness. Thus it is a good idea to hire a bookkeeping company to take care of it all and to help you identify when you have to reduce cost and potential areas to accomplish this.
5. Accounts Receivable Rate
This is a critical KPI as it informs business owners of the amount of time it takes your business to collect outstanding payments in order to increase efficiency or payment collection. Again, this can be a good area where a bookkeeping company can help to identify any issues that might arise based on how your clients are making their payments.
6. Customer Acquisition Cost
Do you know how much it costs your business to get a customer? Well this indicator measures just that.
As your business grows this will become an important metric to keep track of as it can indicate whether marketing efforts are working or if new competitors have entered the market and undercut you etc. If you spend $2000 on marketing in a month and you get 16 clients, your customer acquisition cost is $125 per customer. If this cost increases or decreases, it can indicate a change in a related factor and will prompt you to look into it.
KPI’s are useful in any size business but can be critical to the success of a small business and this is why they are so important to implement, maintain and most importantly review on a recurring basis. Select your company KPI’s based on your specific goals and industry and you will be on the right track to having a more successful business.