Don’t Drown in KPI lists – Here are 4 To Implement Today
Most business owners have almost certainly heard the term “key performance indicators,” or KPIs. Small business KPIs are quick ways for owners to shortcut their financial statements and understand the health of their small business. What exactly are KPIs and why are they important to business owners?
In short, KPIs are bite-sized pieces of data that describe how your business is operating. They are meant to provide you with actionable insights you can use to make decisions.
Data analysis is a complex subject and you might understandably be wondering where to start. In this article, we will provide a quick guide on KPIs and discuss a few, important ones in more detail.
General tips
Small business KPIs can seem unapproachable, especially if you don’t have a background in accounting. You don’t need to feel overwhelmed if you are thinking of starting to track KPIs. These general tips will make taking advantage of data and metrics easy.
With KPIs, less is more
If you have tried to break into tracking KPIs before and didn’t know where to start, this tip is important. There are thousands of KPIs that owner’s can track, and different businesses need to focus on measuring different things. However, by picking just a few important KPIs to start following, you can find the measurables that will be most impactful.
Pick impactful KPIs
KPIs are a tool, and if you can’t use them to make concrete business decisions, they aren’t useful. Pick KPIs for your small business that provide you with real insights about how to immediately improve your day-to-day operations.
Review KPIs frequently
You can’t capitalize on the advantages that KPIs provide without using them to establish trends and benchmarks. Review your KPIs monthly to see if a data point was just a fluke or part of a larger trend. Financial discipline is important, don’t take our word for it. Here is a presentation from the SBA on how often you should review your financial statements.
Follow KPIs that are both operational and financial
You should focus on KPIs that are versatile and provide insights about more than one aspect of your business. For example, employee count: This KPI allows you to simultaneously review performance on a per-employee basis while also impact of payroll expenses. In other words, avoid short-sighted or one-dimensional KPIs that are either purely financial or purely operational.
KPIs to follow
Now that you know why KPIs are important and have some idea of how to start tracking them. You may be wondering about your next step. Below are 4 small business KPIs that are some of the most crucial for owners to begin tracking.
Working capital
Put simply, working capital is how much cash you have at your disposal. Businesses that are looking to expand or considering investment opportunities will want to pay special attention to their working capital.
As a trend, working capital can show you if you need to free up cash. In addition, it can also prevent you from missing out on chances to grow by not having enough cash on hand.
Operating Cash Flow
The amount of cash that is generated from a business’ normal, daily operations is its operating cash flow. For many brick-and-mortar businesses, this KPI tracks how much cash they produce from sales.
Operating cash flow is important because it tells owners whether or not their business model is sustainable. Owners need to know if their businesses aren’t generating enough cash to keep up with operating costs. It’s important that they have a grasp on the amount of cash available to put towards investments or expansion opportunities.
Cash Conversion Cycle
However, this KPI can get tricky since it is actually a combination of 3 different metrics. The cash conversion cycle is the number of days it takes to convert goods or services into cash, usually via sales.
In businesses where careful inventory management is paramount will want to pay special attention to their cash conversion cycle. Above all,it can show them whether mistakes in ordering or maintaining inventory are restricting cash flow. The cash conversion cycle formula is more complicated. However, owners without financial backgrounds may want to consult with a CFO or other accounting services professional when interpreting it.
Accounts Payable Turnover
This KPI measures how long it takes a company to pay those debts. Usually, this KPI focuses on the time it takes a company to pay its suppliers.
Account payable turnover provides owners with valuable insight into their cash flow and operating efficiencies. If this KPI is too high, it may indicate that a company isn’t generating enough cash to pay suppliers timely. Too low, and a company may be neglecting chances to invest cash in expansion or other opportunities.
In conclusion, this certainly isn’t an exhaustive list of important KPIs. Individual business owners should aim to determine which KPIs are most relevant to them. A consultation with a CFO or virtual CFO can be a good jumping-off point for owners looking to prioritize data analysis.
Your Next Step
You may be understandably overwhelmed by the idea of KPIs. Without the proper training, understanding graphs and data can be difficult, and your expertise may not be in accounting.
Consider outsourcing the services of a professional accountant, like a virtual CFO or bookkeeper. These professionals are trained in gathering and interpreting data, and they can help you get a grasp on important KPIs without breaking the bank.
Other Articles You Might Like
Looking for a couple of more articles similar to this you might like? Want to learn more about KPIs for your small business? Check these out:
The KPI Primer For Franchisors
Big Ideas for Small Business: 4 Examples of KPIs for Your Scorecards
6 Signs You Need An Accountant
How Krieger Analytics Can Help
Krieger Analytics specializes in outsourcing accounting services for small businesses, from bookkeeping to virtual CFO consultations. Our background in entrapuernship and finance means we know what running a business entails. We want to meet your accounting needs without burdening you with the costs of a full-time accounting staff. We understand your position as a small business owner, because we have experience running businesses ourselves.
Have questions about anything discussed in this article, or interested in what valuable insights a CFO have for your business? Conversations are free, so don’t hesitate to reach out at [email protected]. Let us explain how our services could be the right fit for you.