The KPIs worth tracking as your business grows

Most small businesses know their revenue and their bank balance. Neither tells you much on its own. Revenue can grow while profit shrinks, and a healthy bank balance can hide a business that is about to run short because customers are paying slower or stock is piling up. Key performance indicators (KPIs) are a short list of numbers that show what is actually happening, early enough to do something about it.

This article covers the measures most worth tracking and how to use them.

Keep the list short

A dashboard with 40 numbers gets ignored. A good rule is to choose six to ten measures that matter most for your business, review them monthly and look at trends rather than single months. Every KPI should prompt a decision if it moves the wrong way. If you cannot say what you would do differently when it changes, it is probably not worth tracking.

Profitability

Gross profit margin

Gross profit is revenue less the direct costs of delivering what you sell, such as materials, stock or direct labour. Gross margin is that figure as a percentage of revenue.

For example, a business with $1,000,000 of revenue and $600,000 of direct costs has gross profit of $400,000 and a gross margin of 40%. If that margin slips to 35% while revenue grows, the business is working harder for less. Common causes are discounting, rising supplier costs not passed on, or a shift in sales mix towards lower-margin work.

Net profit margin

Net profit after all overheads, as a percentage of revenue. It shows whether the business as a whole is earning a return. Comparing it month to month, and against the same month last year, is more useful than looking at a single figure.

Break-even point

The level of revenue at which the business covers all its costs. If your overheads are $300,000 a year and your gross margin is 40%, you need $750,000 of revenue to break even. Knowing this helps with pricing, hiring and deciding whether a new cost is affordable.

Cash and working capital

Profit and cash are not the same. A profitable business can still run out of money, which is why these measures matter so much.

Debtor days

The average number of days customers take to pay. If your terms are 30 days and debtor days are 55, around a month of revenue is sitting with your customers. Reducing debtor days is often the cheapest source of funding a business has.

Creditor days

The average number of days you take to pay suppliers. Paying too slowly damages relationships and can affect your credit standing; paying much faster than required uses cash you may need.

Inventory days

For businesses holding stock, how long stock sits before it is sold. Rising inventory days can mean slow-moving or obsolete stock, and cash tied up on the shelves.

Cash conversion cycle

Inventory days plus debtor days, less creditor days. It shows how long cash is tied up between paying for inputs and getting paid by customers. The shorter it is, the less working capital the business needs as it grows.

Cash runway and forecast

How many months the business could cover its commitments from available cash and facilities, and a rolling cash flow forecast for at least the next 13 weeks or 12 months. This is the measure that gives warning before a crisis rather than during one.

Growth and customers

Revenue growth by segment

Overall growth can hide a problem. Track revenue by product, service, region or customer type, so you can see which parts of the business are growing and which are shrinking.

Customer concentration

The share of revenue from your largest customers. If one customer provides 40% of revenue, losing them would be serious. This also affects the value of the business if you sell it one day.

Customer retention

The percentage of customers who stay or buy again over a period. For subscription or recurring businesses, retention is often the single most important number. Keeping customers is usually far cheaper than finding new ones.

Customer acquisition cost

What it costs in marketing and sales effort to win a new customer, compared with what that customer is worth over time. If acquisition costs rise faster than customer value, growth becomes expensive.

People and productivity

Revenue or gross profit per employee

A simple measure of productivity that helps when deciding whether to hire. Tracked over time, it shows whether growth is coming from scale or simply from adding people.

Utilisation

For service businesses, the share of available hours that are billed or productive. If a team has 1,000 available hours a month and bills 650, utilisation is 65%. Small changes here have a large effect on profit.

Wages as a percentage of revenue

Particularly useful in hospitality, trades and professional services, where labour is the biggest cost.

Financial health

• Current ratio. Current assets divided by current liabilities. It shows whether the business can meet its short-term obligations.
• Debt levels and repayments. Total debt, and how comfortably earnings cover repayments. Lenders watch this closely; see preparing a business loan application.
• Tax and super position. Whether BAS, PAYG withholding and superannuation are paid on time. Falling behind here is often an early warning sign.

Making KPIs useful

1. Get the bookkeeping right first. KPIs are only as good as the numbers underneath them. Monthly reconciliations and consistent coding matter.
2. Set targets. A margin of 38% means little until you know whether the target was 35% or 45%.
3. Look at trends. Compare each month with the previous months and the same month last year.
4. Review with someone. A monthly review with a business partner, adviser or board makes the numbers lead to decisions.
5. Revisit the list. The right KPIs for a five-person business are not the right ones for a fifty-person business.

Revenue tells you how busy you are. Margin, cash and customers tell you whether it is working.

How we can help

We help business owners choose the measures that matter for their business, set up reliable monthly reporting and review the results with them. If you would like a clearer view of how your business is performing, contact us or read about our accounting services.

This article is general information only and does not take into account your circumstances. It is not financial product advice. Speak to a qualified, licensed adviser before acting on it.