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The 5 Most Important Financial KPIs That Drive Local Business Strategy
Sept 19, 2022
Small businesses need financial KPIs to drive strategy because they give you a clear understanding of your current financial situation and enable you to make wise plans for your future.
Establishing the right business strategy is important to running (and growing) a successful business. And knowing which financial key performance indicators to use to inform that strategy is an important part of creating the right strategy for your company, particularly regarding finances.
Financial KPIs can help your business in a variety of ways. For example, perhaps you’re just starting and launching your first strategic initiatives. You’ll need to track how those initiatives affect your bottom line.
What are financial KPIs?
Key performance indicators, or KPIs, are a way for accountants to measure financial outcomes like revenue, profits, and costs. It is a way to analyze a company’s financials using various metrics and segments. Cash flow and net profit margin are two typical examples of top financial KPIs.
What are the 5 key performance indicators?
Whatever your business objectives are, there are a few financial key performance indicators that you should be tracking and using to inform your business strategy. Other small business metrics, in addition to these financial KPI examples, may be useful. However, these are the most important KPIs.
Take note of the performance indicators that explain how to use the data for each financial KPI. This helps you understand the difference between a good result and something that needs to be improved, as well as how it may affect your business strategy.
1. Revenue growth
Revenue Growth is one of the most fundamental and important indicators of a company’s success. It denotes an increase in revenue over a specific time period and is expressed as a percentage. It is the rate of increase in total revenues divided by total revenues from the same exact period the previous year.
Revenue growth should always be positive, and negative growth signals that something is wrong.
The formula to calculate revenue growth is:
Revenue Growth = (Current Net Sales – Previous Net Sales / Previous Net Sales) x 100
2. Revenue concentration
Revenue concentration is another important financial KPI for your company to monitor.
Revenue concentration allows you to determine how much revenue each client or project generates for your company as a percentage of total revenue. You can calculate the ROI for each client using this financial KPI.
The process of calculating revenue concentration begins with an examination of your revenue streams.
You can calculate your revenue concentration once you know how much revenue each client, project, or service brings into your business.
The formula for calculating revenue concentration is as follows:
Revenue Concentration = (Total Revenue / Revenue by Customer or Project) x 100
3. Margin of net profit
Profitability is an important indicator of a company’s financial health. If you want your business to thrive in the long run, you must generate profits.
While several profitability ratios, such as gross profit margin and operating profit margin, can be useful, net profit margin is essential.
The net profit margin measures your company’s profit after expenses. This includes both operating (such as rent and utilities) and non-operating expenses (like taxes and debt payments).
Strategically, the net profit margin provides a snapshot of how profitable you are. Something needs to change if your company is not profitable.
The formula for calculating net profit margin is as follows:
(Net Income / Revenue) x 100 = Net Profit Margin
4. Turnover of Accounts Receivable
If your customers drag their feet and pay their invoices late (or not at all!), it can seriously harm your financial health.
As a result, accounts receivable turnover is a critical KPI. It assesses how well your clients pay their invoices within the timeframe specified.
The following formula is used to calculate annual accounts receivable turnover:
Turnover of Accounts Receivable = Net Annual Credit Sales Average Accounts Receivable
The KPI requires you to know your net credit sales, which are any amounts that are not paid in cash up front. So, for a project-based business, that would be the payment owed for the completed project minus any retainer or fees paid at the beginning of the project.
5. Working Capital
You need money to run your business as a business owner. This money is referred to as working capital, and it assists you in meeting your short-term financial obligations that keep your day-to-day operations running.
Understanding your working capital ratio will assist you in making future strategic decisions, such as hiring new team members to scale your business or investing in new equipment. It will also notify you when you require funding to keep your business running.
The working capital of a company is calculated by comparing its current assets to its liabilities. Working capital is calculated using the following formula:
Current Assets – Current Liabilities = Working Capital
Use Financial KPIs to Drive Your Business Strategy
Hopefully, you now understand the most important financial metrics to track for your long-term financial health, how to calculate them, and what they indicate about your current business strategy.
When used correctly, these financial key performance indicators can help inform how you work to achieve your business goals. They will uncover insights that would otherwise go unnoticed, allowing your company to grow faster and more effectively.
Sara Khalid Digital Marketing Specialist
Sara Khalid is an experienced content marketing professional at Xoopah, a business growth platform for small businesses.
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