As a business owner, there are many different metrics and KPIs out there for you to follow that can give you insight into your company's current standings, along with assistance when it comes to future planning and goal setting. Understanding which of these metrics are important and what they mean is equally as important as being able to run them with your accounting system.
We consulted with our clients to come up with a list of the most common metrics and KPIs that they track in order to keep tabs on all aspects of their businesses.
1. Operating Cash Flow
Inbound cash is what keeps a small business alive and what keeps all of those operating expenses paid. Operating Cash Flow is the amount of cash a company typically generates through its operations. This will give the business a sense of how much it can spend in the immediate future and also forecast if they can increase or should reduce spending.
The analysis of your ratio of operating cash flow allows you to look beyond just profits when it comes to making financial decisions for your company's future.
Revenue is a relatively easy metric to track when it comes to your business financials. Often considered "sales", the revenue of a company is the inbound money before deducting expenses. It is the total dollar amount that the company is making within a given period, but is not the company's net income. A basic revenue calculation is simple:
Revenue = Units Sold * Price per Unit
When a company uses accrual accounting, revenue can be counted before a company physically has the money for a transaction. An instance where this would be encountered is if items or services are purchased on credit - they are still recognized as revenue at the time of sale. With cash accounting, only the money that is in the company bank account is recognized as revenue, so all credit purchases are not reported until finalized.
3. Net Income
Every business owner wants to know how their profits are and how much of their revenue is net income. To calculate net income, you would then subtract your expenses from your total revenue amount. Expenses are everything that your business is spending money on to stay operational. Cost of Goods Sold (COGS), marketing costs, utilities, salaries, etc. are all examples of business expenses that your company can log.
Net Income = Revenue - Expenses
4. Inventory Turnover
Inventory items are constantly coming in and out of your production and warehousing facilities. It can be hard to visualize the amount of turnover that is actually taking place, so an inventory turnover KPI will allow you to track this metric closer to know how much of your average inventory your company has sold in a period. This KPI is calculated using the formula below:
Inventory Turnover = Sales (within a given period) / Avg Inventory (within the same period)
This KPI will give you insight into your company's sales strength and production efficiency.
5. Working Capital
Cash that is used in the day-to-day operations of a business is considered working capital. This can be calculated using the formula below:
Working Capital = Current Assets - Current Liabilities
This helpful KPI informs you of the conditions of your business, in terms of its available operating funds, by showing the extent to which your available assets can cover your short-term financial liabilities.