For those small business owners with accurate financial statements, the next step is analysis. What do you do with that info? If reviewing every line item and digging into the details is too tedious, consider establishing and evaluating KPIs for quick and meaningful analysis.
Key performance indicators (KPIs) are the measurable numbers that drive your small business, and they are unique to you.
Many will be tied to your financial statements, but they can extend to anything you want to measure. For instance, some small businesses have implemented a happiness score to monitor the morale of their company. They have a weekly one question survey, and review the results. When morale drops the happiness score decreases, leading them to immediately address it.
You need to understand what your business goals are, and set applicable KPIs that will get you there. You must consistently monitor them and react as necessary; otherwise they’re wasted.
What KPIs Make Sense For Small Businesses
While all small businesses are different, consider whether any of the below KPIs would be helpful to you.
Accounts Receivable Aging
Accounts receivable aging groups outstanding revenue into buckets such as current, 31-60, 61-90, etc. If your business usually receives payment within 30 days, anything in the 31-60 buckets and older should grab your attention. Address it early, rather than letting it drag for 90 or 100 days, and your cash flow will stay on track.
Accounts Payable Aging
Accounts payable aging does the same as above, but for your bills. If you’ve delegated bill pay responsibility, this will quickly alert you to late or missed bills and help you resolve them before the penalties increase or the vendor stops working with you.
If you have cash flow issues or need to pick and choose which bills to pay, this can also help separate the bills that can and can’t wait.
Most small businesses want to grow, and many of their problems can be avoided as long as revenue continues to grow. Depending on the business and seasonality, month-over-month, quarter-over-quarter, and year-over-year revenue comparisons can help you measure your growth.
COGS as % of Sales
Cost of Goods Sold as a percentage of sales should stay consistent. For example, if your business plan says COGS should be 40% of sales, then your financials should be pretty darn close to 40%. If you have wild fluctuations or consistently miss your expected COGS %, you need to dig into the numbers. Are you simply accounting for things in COGS that are actually overhead, or does your business plan need to be adjusted to operations?
You started your small business to make money at something you’re passionate about or excel at. Look at the bottom line each month and forecast your annual profit to determine if you’re on track. Don’t forget about the associated taxes either.
Inventory turnover is critical to optimizing cash flow and sales. If you don’t know how quickly you sell inventory, you’ll make mistakes sourcing and reordering, and risk running out of stock, missing out on sales.
No business wants staff turnover, but have you ever measured it? Have you seen periods of low turnover compared to high turnover? How did you run your company differently during those periods, and what can you learn to reduce turnover in the future. Some businesses may even plan for a certain amount of turnover, and monitoring this number helps to know whether they’re within the limits of their plan.
No business wants client turnover either, but understanding the average lifecycle of a client helps you plan better for future operations. Perhaps you lose 5% of your clients each year. In order to grow, you need to replace those losses and add more.
Working with Haworth & Company, Ltd.
This is the fun part of accounting. We love working with small business owners to learn how their business runs, what key factors lead to their success, and help them improve operations and reach their goals, all while saving money on taxes wherever possible. We pride ourselves on being your trusted business advisor in the Twin Cities and Rochester, ready to discuss what’s important to you, and offering up our own ideas too. If you’re interested, check out our services page, learn about who we serve, and contact us when you’re ready. We can handle everything, including payroll, monthly financial statement compilation, monthly consulting, and all kinds of tax prep.