3 important SMB metrics to measure for KPI success

Chef leans on counter and looks at customers admiring food through window #SMB

SMB KPI 1. cash runway

What does this mean and why is this important?
Cashflow is the most important metric in every business. Without cash, a company simply goes out of business.
The question you should be asking is “How do my cash reserves compare to my average monthly cash flow needs?” By looking at your monthly cash runway you can estimate how long your company can continue operating before exhausting your cash reserves.

What do you need to monitor? Your cash reserves in comparison to your monthly (or even weekly) cash needs.

Is this relevant to my business?
This metric is most commonly used by startups, businesses that rely on limited external investment or businesses that currently operate at a loss. If your business is currently running at a loss, this metric allows you to estimate how long your company can continue to operate before exhausting its funding.

Give me an example
A startup company has raised million in investments and has been operating at a loss for the past 6 months.
To calculate the cash runway they will need to look at their cash at the end of each period and divide by the average cash requirements on a monthly basis. In the example above, the cash runway varies in each period as we recalculate the cash needs based on the average of the last 6 months.

In simple words… if I need 00,000 to operate on a monthly basis I will run out of money after 10 months ( m / 00k ).\f

SMB KPI 2. sales – actual vs forecast

What does this mean and why is this important?
Preparing a forecast is the first step towards growing your sales and your business. A forecast is all about now and the way forward and what you think you will achieve based on your objectives and substantiated assumptions.

If you have clarity around your businesses future and your goals, you can start identifying what went wrong if you don’t achieve your targets and what worked well if you end up meeting or exceeding your goals. Comparing your actual performance against your targets allows you to measure your success and identify areas for improvement.

What do you need to monitor? Step one would be comparing your actual sales and costs against your expectations and start drilling into more details. Step 2 would be to start preparing 3-way forecasts (profit and loss, balance sheet and cash flow statement) and focus on your cashflow forecast, which is the most vital piece required to build a successful business.

Is this relevant to my business?
Yes, it is! Forecasting and comparisons against your actual performance are essential for every business and vital to its success.

Give me an example
Your expected sales in the next 3 months (based on contracts, market expectations, verbal agreements with customers and your sales in previous months) are equal to 20,000. At the end of the first month, you realise that your actual sales were limited to 0,000, which means you have only achieved 17% of your target.

At this point, you should start asking why. Did I focus on promoting the low price items instead of high-value items (wrong product mix)? Did I lose any big clients to competitors? Do I need to spend more money on marketing and advertising?

SMB KPI 3. return on assets vs return on excess cash

What does this mean and why is this important?
Return on Assets (ROA) allows you to estimate your return (net operating income before tax) on the total assets invested in your business. This is an essential metric for any business, as your assets are an investment with an expected return like any other. If your ROA is significantly low, you might be losing money in your business and you would be better off investing your money somewhere else.  

Excess cash is any cash currently sitting in your bank account and not being used to generate more revenue. If your cash balance keeps on increasing, this means that your business is in a growth phase and you should consider investing or distributing the excess cash.

However, if your cash reserves fluctuate or follow a decreasing pattern, you need to ensure that you have sufficient cash to cover your working capital needs and continue accumulate cash until your cash balance starts following an increasing pattern. Futrli can help you prepare a cashflow forecast or prepare scenarios to look at the impact your base, high, low would show.

What do you need to monitor? Your cash balance and your ROA. If there is an increasing cash generation, you need to consider reinvesting the money back into your business to boost growth even further.

Is this relevant to my business?
The answer is probably yes unless you just started operating which means that your cash position is not your strongest card and you are currently making losses.

However, this metric is especially important for businesses that are currently in a growth phase and have excess cash.

Even though looking at a huge balance sitting in the bank sounds amazing, it’s not always the best use of your cash.
ROA is also an essential metric for any business as it gives clarity on your returns based on capital invested in the business.

Give me an example
Your total assets are equal to 00,000, while your monthly operating income before tax is equal to 0,000. This gives a ROA of 10% ( 0,000 / 00,000).

You also have 0,000 excess cash sitting in the bank and this number grows every month (increasing cash generation). Your current return on the cash (based on the bank interest rate) is 2%.

Based on the two different return rates (10% and 2%), you should consider reinvesting a portion of your excess cash to expand your business, start earning a higher return on that amount and boost your ROA even further.

Share with