The number of sales, amount of income and size of your audience are not the most important KPIs (key performance indicators) for the financial status of your business.
I know those are exciting numbers. However, they lack context and don’t give you a great idea of the true status of your business. They don’t tell you what is needed to increase your income and grow your business.
However the KPIs below will give you better insight. You or your accountant can find the numbers needed for the calculations on your financial reports.
Keep in mind that there are A LOT of KPIs. The ones you should track depend on your business model and what you offer.
Gross Profit Margin
The gross profit margin equals the profit divided by total revenue or income. However, The profit is determined by subtracting costs-of-goods sold only from the revenue.
What are costs-of-goods sold? These are expenses tied directly to creating and distributing the product or service.
It can be used to determine how profitable each revenue stream is. It will also let you know if the costs to produce a product or service is too much.
Net Profit Margin
There’s another great profitability indicator that you should track. Net profit margin also equals profit divided by total revenue.
However, this time the profit is calculated by subtracting all expenses from the total revenue.
The net profit margin gives insight into the profitability of the business as a whole. This is the number that investors or someone analyzing your business financial status will assess.
Operating Cash Flow Ratio
The operating cash flow ratio shows how well your business is able to handle short term liabilities. In other words how well you’ll be able to pay your bills and current debt.
It’s similar to personal finances where you make sure you have enough money in the bank to cover upcoming costs.
Operating cash flow ratio equals operating cash flow divided by current liabilities. This is definitely a metric that lenders and investors analyze.
Alright, I’ll stop there … ok real quick other general KPIs that look at ROI (return on investment) from marketing efforts and sales funnels will show you where to concentrate your dollars for better marketing and sales.
Calculate these general KPIs and look at the trends regularly. You can also add more KPIs specific to your business, for example those applicable to retail and ecommerce.
Analyzing these metrics and their trends will tell you which actions you need to take to achieve your strategic goals.