One of the common buzzwords for small businesses right now is Key Performance Indicators (KPI’s). What is a KPI? Like the name says, they are indicators of performance that is key to your business success. Almost any measurable outcome can be a KPI depending on how it relates to your business. You likely have different KPI’s for different areas of your business such as marketing, productions and etc.
For getting started with KPI’s, it’s best to choose 3-5 indicators that you think most affect your business and begin by tracking them. Starting with a limited number will enable you to give them attention without dividing your attention too far away from your day-to-day operations. So which KPI’s should you start with? That depends on your business but here are a few that you might consider.
This is one of the most important (if not most important) ratios in most businesses. The current ratio has the following formula:
Current Ratio= Current Assets/Current Liabilities
Your current assets are those that will be converted to cash (or are currently cash) within the next year. They include inventory, prepaid expenses, accounts receivable and others. They are measured against your current liabilities (those due over the next year) as a way to determine if you will have the cash to meet your obligations. There is no magic number that this should be but you do want it to be greater than 1 which indicates you do have enough assets to meet your liabilities.
Accounts Receivable Days
Do you carry a significant amount of accounts receivable? If so, you likely want to stay on top of how quickly your customers are paying you and monitoring the average amount of days that your receivables are uncollected will help.
A/R Days= (Average Accounts Receivable/Sales) X 365
The lower this ratio is, the faster you are getting paid by your customers. As this ratio gets higher, you become in danger of running out of cash waiting for your customers to pay.
Gross Profit Margin
This measures how much of each sales dollar is left after paying for the product or service sold. These remaining dollars can be used for paying overhead, salaries and providing profit.
Gross Profit Margin= (Sales-Cost of Goods Sold)/Sales
This ratio is likely different for each product or service line you deliver and can help you decide which products you want to focus on. Monitoring how this changes over time can also help you spot changes in your operations which may become more or less efficient over time.