Four Financial KPIs that Drive Business Growth
As a small business owner, there are different ways that you may measure financial performance. When your expenses are lower at the beginning of your business and clients fewer, it is pretty simple. You look at the amount paid and deduct the direct and indirect expenses for getting the job done. This ultimately gives you the net profit.
As your business grows, financial performance measurement becomes more complex. This is when you need a more objective approach because rather than focusing on profit, you need to be clear about financial health. To do this effectively, you can create metrics or Key performance indicators (KPIs) for the goals you seek to achieve. These will help you evaluate your financial health internally, based on close competitors, and within your industry.
Here are four financial KPIs that can help you drive long-term growth.
1. Net Profit Margin
This figure is a percentage that reveals how much of your revenue is profit. You need this figure to help with profit projections. Furthermore, it helps set benchmarks on an acceptable level of profit and what should raise a red flag. For clarity, look at the industry average and aim to match or go above it.
2. Liquidity
With this figure, you will know the amount of money that you have available in your business for operations, an emergency, or opportunities. It is also able to reveal your cash conversion cycle. This determines the amount of time it takes you to get revenue following an investment. Liquidity improves when the cash conversion cycle is reduced.
3. Return on Equity (ROE)
When a shareholder invests in your business, they are expecting to get a return from your profits. With this KPI, it becomes possible to measure your success in generating profits from the investment given.
4. Return On Investment (ROI)
As a business, you may choose to invest in ventures or avenues that promise to provide a bug return. Typically, ROI can be used to ascertain if spending on marketing is giving a viable return to the business. Conversely, when the ROI is low, it may indicate that different avenues of investment need to be explored.
Each business is unique, and many other financial KPIs can be used to determine growth. To find out what KPIs would work best for your business, you need professional and expert assistance. Schedule a discovery call with RCN CPAs for our range of financial services. We offer Strategic Business Advisory, Virtual CFO, Accounting, and Bookkeeping services to our clients. With proper financial health, your business will thrive.
