Even when you put quality over quantity in a business, there is a list of quantifiable metrics you should always keep on your radar – Key Performance Indicators (KPIs). Maybe when you were starting a company, some decisions were supported by your gut feeling only, and it’s fine if you still trust your intuition in some cases but running a $5M-$20M business demands more well-informed decisions, the ones based on the insights you get from analyzing the vital KPIs. In today’s blog, we’ll go through the ten critical KPIs to grow your business.
Ten Vital KPIs for SMBs
As a business leader, you can decide to rely on financial management software to get the data or look for the metrics manually and collect them from your team members. Whichever strategy you prefer, here is the list of ten most important KPIs you should always monitor as an SMB owner.
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Gross Profit Margin
If you want to know the overall financial health of your company, this is the best indicator. Take the total product sales, subtract the cost of goods sold (COGS – everything that goes into manufacturing a product or delivering a service, like the cost of materials, labour, etc.), and you’ll get the gross profit margin. Sometimes it’s referred to as the gross margin ratio, so don’t get confused if you run into this term as well. When a gross profit margin is high, a company manages to effectively convert its product into profits.
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Operating Profit Margin
This metric shows the portion of the profit that an organization makes from operations before subtracting interest and taxes. Another way of looking at this indicator is subtracting operating expenses from gross profit, in other words, Earnings Before Interest and Taxes (EBIT). Rising operating margins often mean better management and cost control inside a company.
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Operating Cash Flow
The amount of cash a company generates through regular operations is usually referred to as Operating Cash Flow (OCF). This metric is especially important if you want to find out how much your company can spend in the immediate future and whether any spending reductions are necessary. Besides, if customers don’t pay their bills in time or even don’t pay them at all, OCF will show it.
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Working Capital Ratio (or the Current Ratio)
If you want to find out whether your company can meet its long-term financial obligations or no and how liquid the business is, Working Capital Ratio is the indicator that has the answers. Companies often aim at a ratio of 1.5-2 because anything below 1 indicates financial problems, current or potential, and everything higher than 1 means that an organization’s assets exceed its liabilities.
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Quick Ratio
This metric is very similar to the previous one; the only difference is that Quick Ratio measures whether a company can meet its short-term financial obligations, not the long-term ones. Also called the Acid Test Ratio, this metric evaluates if a business has enough assets to cover its current liabilities. Similarly to the Working Capital Ratio, anything below 1 might mean that this business model is not viable, while a ratio of 1 and higher indicates that an organization has enough assets to pay off its financial liabilities.
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Return on Assets
Look at this KPI to measure how well a company uses its assets in terms of profitability. It also gives an idea of how effectively business assets are used to generate profits. To calculate Return on Assets, divide a company’s net income by total assets. This indicator is especially important for Manufacturing businesses and other industries where assets and equipment are the life blood of an organization.
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Days Payable Outstanding
This financial ratio is usually calculated on a quarterly or annual basis, and it shows how efficiently the company’s cash flow is managed. It indicates the average number of days it takes a company to pay its bills and invoices to creditors, suppliers, and vendors. What’s more, DPO can give an idea of whether a company benefits from discounts and on-time payments to vendors or no.
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Days Sales Outstanding
In short, DSO shows how many days it takes a company to collect payments for its products or services. The longer it takes a company to get paid, the higher DSO is, the more likely cash flow problems are.
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Cash Runway and Burn Rate
Cash runway measures how much time a company has before it uses all its cash. This metric is based on the money the company has available at the moment and its monthly expenses. Cash runway gives business leaders an idea of when they should cut back spending or find extra funding to keep operating. Generally speaking, if your cash runway steadily decreases quarter after quarter or even month after month, it means that your organization is spending more than it can afford to. Another metric to consider here is the burn rate that is usually used to indicate the rate at which an investor-backed start-up is spending its venture capital before generating positive cash flow.
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Budget vs. Actual
As easy as it sounds, this KPI compares a company’s budgeted amounts against the actual spend or sales in certain areas. Budget vs. Actual helps family business leaders identify that need further attention because that’s where they’re overspending or these areas outperformed expectations.
We hope that these crucial financial indicators make more sense to you now! Feel free to reach out if there's something we missed. In the next blog, we'll guide you through the process of prioritizing these metrics and how to keep them aligned with your company's overall goals.