KPI Reporting for Small Business – Beyond Your Bank Balance
In many businesses, particularly in those early days, owners check the success of their operation by looking at their bank balance. If there’s cash there, and it’s generally going up every week, then everything must be on the right track.
The problem is, as your operation grows and becomes more complicated, your bank account isn’t enough to gauge your enterprise. It’s possible to have hefty cash reserves yet be insolvent … or have a small bank balance yet be incredibly profitable.
Misunderstand, and it could be curtains for your business.
Therefore, you need Financial KPIs for SMEs … powerful, data-driven insights that give an accurate picture of where your operation is today, and where it’s going tomorrow.
What Are Financial KPIs?
Think of your business as a car. To drive it safely and reach your destination, you’re not just looking at the road. You’re also constantly checking your speedometer, scrutinising your fuel level, and keeping a watchful eye on the engine temperature. This means you always have a complete picture of your vehicle’s condition.
Financial KPIs are the gauges on your business’s performance dashboard.
They’re detailed and specific checks that show if everything is ticking over nicely, whether you’re moving forwards or backwards, or if a breakdown is imminent. Instead of guessing how you’re doing based on your bank balance, how busy you are, or how much product you’re shifting … KPIs give you the hard facts.
But, it’s way too time-consuming, inefficient (and to be honest, pointless) to track absolutely everything. That’s why ‘key’ performance indicators are used … only the most important numbers your business needs to grasp its position.
The Most Important KPIs for Small Businesses
1. Cash Flow KPIs – Your Operations Oxygen
As Australian business guru Alan Miltz famously said, ‘Revenue is vanity, profit is sanity, but cash is king’. Sure, you’re issuing numerous invoices, and on paper, you’re making a profit … but if your cash is trapped, your business is heading for trouble. That’s why cashflow is probably the most valuable KPI.
Crucial Cashflow KPIs
- Operating cashflow – the actual cash moving in and out of your business, seeing if your efforts are creating liquidity.
- Debtor days – how long it takes customers to pay you. If it’s too long, you might be unable to pay suppliers or staff.
- Cash conversion cycles – the time between you spending money and receiving cash back.
2. Profitability KPIs – Is Your Business Really Making Money?
While cash keeps your business ticking over today, profitability shows if it’ll still be here next week. If your margins are small or negative, you haven’t got a business … you’ve got a charity. These powerful KPIs reveal whether your ceaseless hard work is turning into genuine wealth.
Vital Profitability KPIs
- Gross profit margin tracking – the difference between the price you pay for a product and what you sell it for.
- Net profit margin analysis – how much money is left over after you deduct all costs, including rent, wages, and insurance, etc.
- Revenue growth rate – checks sales growth over time, demonstrating if your business is scaling up.
3. Liquidity and Efficiency KPIs – Are You Running a Tight Ship?
Liquidity and efficiency KPIs show whether your business can meet its debts as they fall due, and how it’s using its resources on a daily basis … effectively illustrating if your enterprise is solvent. Furthermore, they can indicate if your operation has the ability to respond quickly or slowly to financial commitments.
Essential Liquidity and Efficiency KPIs
- Current ratio – measuring your business’s ability to meet all its short-term obligations with its current assets.
- Expense ratio – demonstrating how much your overheads draw on your revenue.
- Working capital ratio – the difference between current assets and liabilities, showing the buffer available to keep your business operating.
The Unmatched Benefits of Precise KPI Tracking for SMEs
KPIs are more than just a business healthcheck or performance monitor … they’re about understanding exactly how your business functions, and where you can direct attention to improve your financial and growth position. They allow you to:
- Spot red flags early – for example, you can anticipate cash bottlenecks, giving you time to adapt before a disaster occurs.
- Make informed decisions – KPIs help you make fact-based guided decisions on such things as hiring new staff members or buying equipment.
- Boost business value – if you choose to sell or seek investors, a history of clear KPIs can prove your operation is professional and viable.
- Enjoy reassurance – knowing exactly how your business is operating brings immense peace of mind.
- Improve cash flow control – manage in- and-outflows more effectively, avoiding the stress experienced by 41 percent of business owners.
- Heighten profitability – seeing what products, services, or clients are actually bringing in the money.
- Plan confidently – accurate data means you can decide on realistic goals and make strategies based on evidence.
- Improve efficiency – KPIs can show where time, money, and resources are being wasted.
How to Track Financial KPIs for SMEs
In the past, tracking KPIs needed hours of manual data entry into either bound ledgers or complicated spreadsheets … which could be confusing and error-prone. Thankfully, today the entire process is much more straightforward and convenient … but still demands expertise, accuracy, and the right setup.
The Power of Cloud Accounting Software
Most SMEs already utilise cloud accounting systems … such as Xero or MYOB … to keep control of their financials. When used with accurate bookkeeping, these platforms can generate KPIs … allowing you to access dashboards that show some key metrics at a glance, helping you stay informed without getting lost in the detail.
The Human Element Requirement
Software can effortlessly calculate KPIs, but don’t tell you what they mean for your business … or what you should do next.
KPIs need to be interpreted, scrutinised, questioned, and ultimately acted upon. What’s more, off-the-shelf accounting platforms might not automatically give the exact KPIs you need, especially if your business has unique characteristics. And without any context, numbers are just, well, numbers.
It’s one thing to see a net profit margin of 15 percent or a current ratio of 1.4:1 … but if you don’t know if that’s good or bad, which direction it should be going over time, what’s causing it, and what your response should be … you might as well return to guesswork.
That’s where the human element comes in … turning your reports into meaningful KPIs, and consequently, into action.
Making It All Make Sense – The Role of a CFO or VCFO
The person who transforms KPIs into understanding and action needs to be someone experienced in interpreting financial data and building proactive strategies.
Many business owners think that maybe their current accountant could take on the role of strategic advisor. But traditionally, in larger corporations, these strategic responsibilities are taken on by a CFO (Chief Financial Officer). You can explore the key differences in our guide on Accountant vs CFO.
Chief Financial Officer – Valuable, But Costly, Strategic Leadership
For substantial operations, an in-house CFO is a permanent fixture. They’re living and breathing the company’s KPIs every day … managing everything from strategy to risk mitigation. However, knowing when to hire a CFO is a challenge for SMEs, as the salary and overheads of a full-time executive are often completely out of reach.
The Virtual CFO (VCFO) – Expertise Without the Overhead
SMEs can receive immeasurable benefits from a Virtual CFO. They give the same level of financial oversight, insight, strategy, and experience as a traditional CFO … but on a flexible, cost-effective structure. Instead of employing a full-time executive, you’re gaining someone on specific projects or an ongoing basis, as needed.
Virtual CFOs interpret KPIs and turn them into insights and action:
- Verifying the accuracy of KPIs.
- Improving cashflow management and forecasting.
- Decoding management reporting.
- Identifying opportunities that supercharge profitability.
- Supporting strategic decisions in areas like growth and investment.
- Ensuring accurate, relevant financial reporting.
- Assisting with MYOB and Xero KPI dashboards.
- Aligning KPIs with your specific business goals and priorities.
Are You Ready to Use KPIs to Drive Your Business Forward?
Your business is way too important to rely on guesswork … you need targeted, accurate, and actionable financial KPIs to take you in the right direction.
At DSV Partners, we help you transform obscure metrics into powerful strategies. From advising on cloud-based platforms such as Xero and MYOB, recommending the most powerful KPIs for your business, and delivering Virtual CFO services to interpret the data, we give you the insight and understanding you need to drive your enterprise.