6 FINANCIAL KPIS TO WATCH LIKE A HAWK

Earlier this year, I wrote an article about my worst business nightmare. I didn’t have to think too hard about #1 on my personal hit parade. It was the day I was told that we couldn’t make the payroll bill! I was one month into my CEO role so this was not the start I wanted. You can read the story HERE. 6 Financial KPIs To Watch Like A Hawk

This incident may have happened 13 years ago, but it’s still deeply engrained in my memory. My first few weeks had been a baptism of fire, dealing with one crisis after another, and my To Do list was enormous. This incident made me realise that I needed far better information than was currently available to aid my decision making. So I sat down to work out the most important KPIs; the numbers I needed to keep track of on a weekly and monthly basis.

So what are KPIs, and what are the benefits of measuring them?

KPIs or Key Performance Indicators are used to assess how successful a business is being in reaching its goals. Tracking relevant KPIs helps us to make important decisions about our company’s growth and development.

I often use a flying analogy to illustrate how KPIs help us to keep our business on course. Imagine a flight from London to New York City. Once the plane takes off, the captain and crew use a set of navigation data to understand where they are relative to their intended flight route. In this instance, useful KPIs might include the GPS location data, average speed, fuel levels and weather information etc. Together, these key metrics (or KPIs) allow the crew to understand whether they are on track or veering off course. This enables them to make decisions about whether, when and how they need to course correct. Planes actually fly off course much of the time. But because the captain and crew make continual use of the navigation data, they course correct continually to arrive at their intended destination.

There are different types of KPI – including financial, customer, sales, marketing, HR. In this article I’m going to focus on the financial KPIs you should watch like a hawk.

1. Cash Flow Forecast

The cash flow forecasts is one of the most important KPIs for a business to track. Smart business owners review their cash flow forecast on a weekly basis so that they can identify problems at an early stage and make any necessary course corrections. Along with helping businesses anticipate upcoming surpluses or cash shortages, a cash flow forecast is essential for tax planning and loan applications.

[callout]Are you on the cash flow roller coaster and wanting to get off? If so, my short e-book How To Take Financial Control Of Your Business sets out the first steps to getting off the cash flow roller coaster. You can download your copy HERE.[/callout]

2. Gross Profit Margin as a Percentage of Sales

No business can achieve success if it’s paying out more to suppliers than it’s netting in sales each month from customers. This is why it’s so important to monitor your gross profit percentage.

To calculate the gross profit percentage, find your business' gross profit margin (GPM) by dividing your gross profit amount by your sales. Take this number, multiply it by 100, and you will have your gross profit margin expressed as a percentage.

Next, to find out how much of your GPM makes up your overall sales, divide that value by your sales amount. Here's the equation you use:

(Gross Profit/Sales x 100) / Sales

The benefit of tracking this KPI over time is that you can easily quantify how much money you're keeping against the amount paid out to suppliers. As businesses retain more money, gross profit margin increases. But a decrease in gross margin as a percentage of sales could indicate that a business is overspending on its supplies. In this instance, the owner would need to either reduce overhead costs or increase prices on goods and services to compensate.

3. Cost Of Goods Sold (COGS)

Tallying the total production costs for the product or service your company is selling, will tell you (a) what your product mark-up should be and (b) what your actual gross profit margin is. This is important for your pricing strategy.

When it comes to mark-up, I recommend that you never price your product or service lower than COGS plus 45%. If you fall below the COGS plus 45% threshold, you will struggle to create enough profit to run a viable business.

4. Revenue Growth Rate

Revenue growth refers to the rate at which your company’s income, or sales growth, is increasing. To find revenue growth rate, start with your business' total revenue for the current year. Next, divide current revenue by total revenue from the previous year to find the rate of growth.

By calculating revenue growth rate regularly, you can assess whether growth is increasing, decreasing, or plateauing. Use this information to make any necessary changes to stay profitable.

When I’m working with 1:1 business coaching clients, we set a monthly revenue growth rate which is based on the resources they have available for sales and marketing. If the business has limited sales and marketing resources, this could be just 2% a month. Over the course of the year, that business will have grown by more than 24%, meaning that it has a higher budget to invest in its sales and marketing activities. What’s important is that the business is making steady, positive progress towards its’ targets.

[callout]Are you on the cash flow roller coaster and wanting to get off? If so, my short e-book How To Take Financial Control Of Your Business sets out the first steps to getting off the cash flow roller coaster. You can download your copy HERE.[/callout]

5. Accounts Payable Turnover

A business won’t keep its doors open for long if it fails to pay suppliers. Accounts payable turnover is a measure of the rate at which your business pays for goods and services, revealing the amount of cash spent on suppliers in a given period. You’ll find this information in the reports section of accounting software like Xero.

To calculate accounts payable turnover, you add up the cost of total supplier purchases and divide by average accounts payable. Once you know how much you spend on suppliers, you can determine whether you should take steps to reduce spending, which should then boost long-term profits for your business.

6. Inventory Turnover

Inventory turnover measures the number of times inventory is sold or used in a given period of time. It’s an important measure because it reveals a business’ ability to move goods. Calculating your inventory turnover ratio can help you measure and plan for adjustments in inventory as needed.

Inventory turnover is calculated by adding up the cost of sold inventory, then dividing that total by the value of the remaining at year’s end.

Recently I did a piece of consultancy work for a company that had invested heavily in new stock, and was on the verge of running out of cash. But it was sitting on stock that was going to take a while to shift. It quickly became apparent that the owner had understand the inventory turnover rate of the business. To get out of the financial mess he’d created, the owner then had to hold a flash sale to liquidate as much stock as possible.

Tracking these financial KPIs will enable you to steer a steady course with your business. And when you notice that your results are going slightly off track – which they inevitably will – you can take prompt action to course correct and get back on track.

[callout]A big thank you to Franziska Neuman, the owner of a Santa Fe based design agency, for reply to a recent question I asked subscribers to my email list: what is the #1 area you're struggling with right now. Franziska asked how she could determine the right KPIs for her business.[/callout]

Join the Conversation

Question: Do you track your financial KPIs? How has this helped you manage your business? I love to receive your feedback, so please do let me know in the comments box below.

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I’m Denyse Whillier, a London based business coach and consultant. I guide entrepreneurs from across the globe to achieve profitable, scaleable growth and create businesses that are Built To Succeed™. Built To Succeed™ is my proven success system, developed during my 8 years in the trenches as a CEO, 25 years’ experience at senior leadership and managerial level and training at Cranfield School of Management, the UK's leading business school. It's this background that sets me apart and helps my clients to get BIG results.

I’d love to start a conversation. Simply use this link to arrange an informal Skype coffee chat. There’s no hard sell. Just solid advice and a straightforward, honest assessment of whether 1:1 business coaching (or business consultancy) would be a good fit for your business, the results you can expect and how to get started.

To get a copy of my e-book, 'How To Take Control Of Your Business ... And Get Off The Financial Roller Coaster,' click HERE.