As a small and medium-sized enterprise (SME) owner, you know how important it is to keep your business's finances in check. But how do you actually do that? One way is to monitor key performance indicators (KPIs) that give you a good picture of your business's financial performance.
By regularly tracking your financial KPIs, you can make smart decisions for your business, spot areas that need improvement, and make sure your business is making a profit and can last long-term.
So, let's dive into the top 10 financial KPIs every SME owner should monitor.
1. Cash Flow
This KPI represents the amount of cash that flows in and out of your business over a specific period. Monitoring your cash flow regularly is essential to ensure that you have enough money to cover your expenses, pay your bills, and invest in growth opportunities. For instance, 89% of small business owners say cash flow issues negatively impact their business.
2. Revenue Growth
It goes without saying that it is essential to monitor your revenue consistently to assess whether your business is growing or declining. A decline in revenue could indicate that you need to adjust your pricing, marketing strategies, or product offerings.
Interestingly, 29% of startups fail due to running out of cash. Consistent monitoring of revenue can help businesses identify potential cash flow issues and take proactive steps to avoid running out of money.
3. Gross Profit Margin
Gross profit margin measures the percentage of revenue after deducting the cost of goods sold (COGS). It indicates the efficiency of your operations and helps you understand how much profit you generate on each sale. A declining gross profit margin may indicate that you need to re-evaluate your pricing strategy, reduce your COGS, or improve operational efficiency.
The size and nature of a small business can determine its profit margin. Typically, a healthy profit margin for small businesses falls between 7% to 10%. However, this may vary for certain industries, such as retail or food-related businesses that tend to have lower margins.
4. Debt-to-Equity Ratio
The debt-to-equity ratio measures the amount of debt your business has compared to its equity. For instance, a high debt-to-equity ratio may indicate that your business is highly leveraged and may struggle to meet its financial obligations.
What’s more, a high debt-to-equity ratio can increase a business's risk of default and make it more challenging to attract investors, so it's crucial for small business owners to monitor this ratio closely.
The ideal debt-to-equity ratio varies depending on the industry, but a ratio of 2:1 or lower is generally considered healthy.
5. Working Capital
Working capital is an important financial metric for SMEs as it provides a measure of the company's short-term liquidity and ability to meet its operational expenses. Working capital is calculated by subtracting current liabilities from current assets, which gives a company an indication of how much cash it has available to fund its day-to-day operations.
Understanding how working capital works is vital for small businesses, as nearly 30% fail due to capital depletion, highlighting the importance of managing working capital effectively.
To manage their working capital effectively, SMEs should focus on improving their cash flow by reducing inventory levels, negotiating better payment terms with suppliers, and improving their collections process for accounts receivable.
6. Sales Growth Rate
Tracking sales growth rate is essential for SMEs because it provides insight into the company's revenue growth over a specific period. Sales growth rate measures the percentage increase or decrease in revenue from one period to another, which helps SME owners understand the pace at which their business is growing.
To illustrate, a software company that develops project management platform may track its sales growth rate to measure how successful its marketing efforts are in attracting new customers. If the sales growth rate is not meeting the company's expectations, it may need to adjust its marketing strategies and improve its lead generation process.
7. Net Profit Margin
Another business KPI to track is the net profit margin. This KPI measures the profitability of your business after all expenses have been deducted from revenue. It's calculated by dividing net income by revenue. Net profit margin is essential for SME owners as it provides insight into how efficient their business is at generating profits from sales.
8. Inventory Turnover
This KPI is all about how often you sell and replace your inventory within a certain timeframe. Why is this important? Because it tells you how well you're managing your inventory. If you have a high turnover, that means you're selling things quickly, but a low turnover could mean you're holding onto stuff for too long.
Let's say you run an e-commerce store that sells electronics. If your inventory turnover is low, it could be a sign that you're holding onto outdated products that customers don't want anymore. By monitoring this KPI, you can figure out which items are moving slowly and adjust your inventory strategy to include more popular items and boost your sales.
All in all, understanding the data around your inventory and operations has been shown to help increase efficiency and maximize your business’s cash flow.
9. Quick Ratio
Finally, the quick ratio measures if your business can cover short-term obligations with liquid assets like cash and accounts receivable. A ratio of 1 or more means you're good, but a low ratio can hurt your credit and relationships with suppliers and customers.
If you're feeling overwhelmed or not sure how to start tracking your business KPIs, don't worry. The team at Sanay is here to help.
We have the expertise and experience to guide you through the process and help you grow your business. Contact us today to learn more about our services and see how we can take your business to the next level.
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