Let’s say you got up this morning with a headache. You know from experience that it’s a small niggle, and it will go away on its own. But what if you got up tomorrow morning, and the headache got worse? If an aspirin does not help, you will surely go to a doctor, and most likely get some diagnostic checks done.
A KPI (key performance indicators) dashboard is like a diagnostics report of various parameters that reflect the health of your business. KPI’s help you measure your business’s financial health.
You can define KPIs for different areas of your business, from HR, Finance, Marketing to Operations. You can combine these KPIs to arrive at an overall health for your business.
The Finance function is like the blood flowing through your body; it affects each part of it and keeps it healthy and oxygenated. Similarly, your company’s financial performance has a direct impact on every aspect of your business.
Remember, that KPI’s and dashboards are not just for CFO’s of large organizations. It is relevant for every business owner, and even more important if you are small and growing. If you don’t keep a close tab on your finances, you and your business will both become irrelevant within no time.
The 4 most important questions for any business owner are:
- Do I have enough cash to meet my short term obligations (Cashflow indicators)?
- How much am I earning (Revenue indicators)?
- How much am I spending (Expense indicators)?
- Am I making a profit (Profit indicators)?
Here are five basic financial KPIs that cover these 4 aspects:
At a minimum, you should track these to ensure that your business is meeting its goals.
1. Current Ratio (It is a Cashflow indicator)
The current ratio or working capital ratio indicates a company’s ability to meet short-term debt obligations. It measures whether or not a firm has enough resources to pay its debts over the next 12 months. If the current ratio falls below 1, it means that you do not have enough cash coming in to pay your bills.
Current ratio = Current Assets / Current Liabilities.
Other useful Cashflow indicators are: Free Cash flow, Cash and Bank Balances and Ratio of Payment Received to Invoiced.
2. Sales Growth (%) (It is a revenue growth indicator)
The amount by which the sales of a company’s products or services have grown compared to corresponding previous period of time. An increasing trend in sales growth is critical to a company’s survival and profitability.
Other useful analysis would be to compare current period revenues against a rolling average of revenues. Also analyze the % contribution by product/service line.
3. Operating Expenses
Operating Expenses are expenses incurred in the daily operation of business (examples being: administrative expenses, rent, office expenses etc.)
It is important to compare changes in operating expenses against changes in revenues to get an understanding of real revenue growth. It is also important to monitor the constituents of operating expenses and control the ones that contribute the most.
4. Gross Profit Margin
Gross profit margin is an indicator of whether you are pricing your products and services profitably.
Gross profit margin = (Revenue – Cost of Goods or Services Sold)/Revenue
Your gross profit margin should be large enough to cover your operating expenses.
5. Net Profit Margin
Net profit margin is the percentage of revenue left after all expenses including taxes. It is calculated as follows:
Net profit margin = (Revenue – Cost of goods sold – Operating Expenses – Interest & Taxes)/ Total Revenue
This metric helps you set benchmarks for profitability.
If you need help/advise on automating the processes for monitoring KPI’s for your business, leave a comment or send me a LinkedIn message.