Financial KPIs and Metrics for Small Business Reporting
Key Performance Indicators (KPIs) are metrics that small businesses can use to monitor their progress towards business objectives in more ways than simply cash in the bank or business sales. It can seem like there are an infinite number of KPIs that you can track, and sometimes it's even hard to tell them apart (the difference between gross profit margin and net profit margin are hardly taught in school!). This is largely because KPIs can be anything that is tracked that can be used as a measure of the company's performance, for example, you could use surveys to track customer satisfaction or a restaurant could track the number of covers they serve. This blog however is going to focus specifically on financial metrics and KPIs for small businesses.. We'll take a look at the different metrics that you can consider adding to your company's financial statements.
Let's start at the beginning; the most important financial KPI for any small business to track is their revenue. Revenue, sometimes called income, is simply the money that comes into the business in a period of time.
Unfortunately, it's not as simple as taking all the money coming into the business and just reporting that. Revenue could be increasing but the money in your bank account could be decreasing. Gross profit looks at what's left of revenue once any costs that went into production/manufacturing have been deducted. Gross profit is one of the simplest key performance indicators (KPIs) for measuring how efficiently a company is producing its wares. For example, if gross profit is decreasing while income remains steady then something in the production or the supply chain is getting more expensive, allowing you to diagnose the issue quicker.
Gross profit doesn't deduct any VAT, tax, other bills, staff costs, or cost of sales though. Because of this, it can't be used to give you a complete picture.
Here's the formula to calculate gross profit:
Gross profit = revenue - cost of goods sold
Now, let's take a look at how we can use this formula to give us the gross profit margin to give us a bit more insight.
Gross profit margin
Gross profit margin is calculated as a percentage so it can give an extra layer of detail.
Here's the formula;
Gross profit margin = (revenue - cost of sold) / revenue
Key performance indicators (KPIs) like this one that use a percentage rather than discrete figure allow companies to compare themselves to other businesses and therefore get a clearer idea of how their business is doing, not just simply how much profit they're making.
This is your bottom line revenue - it's what's left after everything else that needs to be deducted has been deducted. Net profit takes it one step further than gross profit as it deducts all tax/VAT, other bills, staff costs, and cost of sales.
Here's the formula:
Net profit = total revenue - total expenses
This is one of the core key performance indicators (KPIs) that is widely used by small businesses around the world.
Net Profit Margin
Like gross profit margin, this is the percentage version of net profit. Similarly, it gives more context than just a straight number. This is one of the strongest key performance indicators (KPIs) used to measure financial health. It is often looked at by investors when assessing a business.
Here's the formula;
Net profit margin = net profit / revenue
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It's a good number to give an overview of how efficiently the overall company is operating. This is because it eliminates the extraneous factors that the company has no power over, like interest rates.
Other potential KPIs for small businesses
Which KPIs are best for your business vary from business to business and from industry to industry. In this blog we have only gone through the basics that apply to all businesses. Consider what your business goals are and look at what metrics are used in your industry. Things like customer acquisition cost, customer lifetime value, cash flow, or monthly recurring revenue can all tell you critical things about your sales growth and financial obligations but might not apply to every business.
Why are financial KPIs and Metrics important for any business?
KPIs are essential for any business as they can be used proactively to protect your business and increase success. For example, an increase in EBITDA but a decrease in overall sales tells you that your business is operating efficiently but external factors are affecting net income.
KPIs can be a lot to keep track of, but luckily there are many tech solutions to help you. Futrli makes software for any small business to keep track of their financial KPIs.
Business Finance KPI FAQs?
What is a financial KPI?
A financial KPI is a metric that can be measured or calculated from a business's financial statements and used to assess their financial stability.
How often should I track financial KPIs?
This varies depending on the rate of activity in your company or industry, and the KPI that you're tracking. Some KPIs will be better tracked more frequently than others. Work out which KPIs are most critical to your business and check them more regularly, work out which are indicative of long-term financial success, and check them less frequently.
What are the most important financial metrics and KPIs?
This varies depending on your financial goals and the industry that you're in. It is best to speak to peers in your industry and look at what your concerns are. Basic financials such as gross or net profit, working capital, or cash flow, are commonly used across industries.