Financial KPIs to Keep Your Business on Track in 2023
It’s likely that your end-of-year and beginning-of-year planning led you to analyzing your business’ performance and setting goals for the new year. However, it’s crucial to have a strong foundation of key performance indicators to be able to measure those goals, ensuring that your business meets its objectives in 2023. Financial key performance indicators (KPIs) are specific metrics and criteria that help you and your financial team to track progress toward strategic goals. We’ll discuss some of the most useful financial KPIs for business owners below.
Cash Flow Forecast
A cash flow forecast is a plan that shows how much money a business expects to receive in, and pay out, over a given period of time. Because it shows whether sales and profit margins are favorable, a cash flow forecast is one of the best KPIs to use.
A typical cash flow forecast is built for a rolling 13-week period. The main goal of a cash flow forecast is to assist with managing liquidity within an organization, ensuring that the business has the necessary cash to meet its obligations—like payroll and bills—and avoid funding options. Essentially, having a well-built cash flow forecast will let you know where your business’ cash is headed and prevent any unforeseen dips along the way.
Revenue Growth Rate
Revenue growth is another KPI that does exactly as the name implies—tracks the rate at which your revenue is growing over a given period of time. This is an especially common KPI for start-ups, as a good revenue growth rate can attract investors, further promoting organizational growth. By calculating your revenue growth rate on a periodic basis, you can more easily identify if your business is growing, shrinking, plateauing—then, make decisions accordingly.
Gross Profit Margin as a Percentage of Sales
It’s critical to have a metric that ensures you aren’t paying suppliers more than you’re netting in sales. Gross profit margin as a percentage of sales shows what your business’ total profits are compared to your revenue.
Tracking your GPM as a percentage of sales overtime will allow you to more easily quantify the amount of earnings you’re keeping. Your gross profit margin increases as you retain more money, but a decrease in this KPI can point to spending too much on supplies. This indicates a need to reevaluate fixed costs or pricing models. An outsourced accountant can help you not only implement this KPI, but analyze it in order to make business decisions.
Calculating your inventory turnover rate highlights the number of times the average balance of inventory was sold during a period. This is generally calculated for a year-long period, but can be calculated for shorter or longer windows of time depending on the business’ needs.
Generally, a low inventory turnover ratio can indicate that you’re over-purchasing inventory, sales are poor, or pricing models aren’t effective. Higher ratios point to the business having less inventory overall or strong sales. This is also true of very high ratios, which indicate that your business is struggling to meet the demands of your customers. Focusing on this KPI can help you make better purchasing and marketing decisions.
Cash Conversion Cycle
Measuring your cash conversion cycle goes along with inventory turnover, as this KPI looks at how long it takes for your business to convert a dollar of inventory into actual cash received from your customers. This means that you’re analyzing both how long it takes to sell inventory, as well as your collections process. Not only does this help you understand your cash flow position, but could also highlight areas of your AR that need to be improved.
Current AP & AR Ratios
These metrics demonstrate whether your business is paying its bills on time, as well as whether your customers pay invoices on time. High ratios in both of these categories show that you’re paying bills on time and that there are fewer unpaid customer invoices, whereas low ratios show the opposite.
AP and AR ratios relate back to cash flow, as issues in these areas can lead to cash problems.
It’s common knowledge that keeping a customer is far less expensive than acquiring a new one, which is why measuring your customer retention can help boost your business. Focusing on your customer retention rate will allow you to identify your most valuable customers. This information allows you to make marketing and sales decisions accordingly. Two metrics to watch for include your customer churn rate—how often customers stop doing business with you—and repeat purchase ratio, which looks at the amount of customers that return after their initial purchase.
Which KPIs Should You Focus On?
There is an extensive list of financial KPIs, as a KPI can be based on any type of data or information that is of highest priority to the company. As such, the best ones you use will vary based on your business’ needs. Before determining the most useful KPIs for your business, you should first have a clear picture of your goals, your business model, and the processes and procedures unique to your company. It’s similarly a good idea to focus on a handful of KPIs (rather than just one), comparing them alongside the other, to create a fuller view of your business’ performance. Bringing on a fractional, outsourced accountant or consultant can help you not only determine which KPIs are most valuable to your business, but can implement those metrics and aid in business decisions based on tracked data.