7 KPI’s Every Business Should Use
When you’re a busy entrepreneur focused on growing your business, it’s really important to keep your eyes on the right things and make the most of your time. A dashboard that tracks Key Performance Indicators is a great tool to help you focus on the right things.
There are dozens upon dozens of KPI’s you can track. I’ve boiled them down to 7 basic, yet important ones. If you’re pressed for time and on the go, these are the ones to concentrate on.
1. Net Sales – Track the amount of invoiced sales, less discounts and returns, to see what the future holds for cash inflows. Some businesses collect payment from customers at the time of sale. Invoices are virtually the same as cash. Other businesses allow their customers time to pay.
2. Cash Balance – You have to know how much cash you have in order to assess whether you can pay your bills. Use the cash balance recorded in your accounting system, not the online bank balance. When kept up to date, the accounting system is the most accurate source of cash information. Your bank account lags behind because people don’t always cash checks quickly and deposits aren’t always available right away.
3. Bank Deposits – Bank deposits tell you how much of your invoiced sales were paid and whether you’re bringing in enough money to pay your normal expenses.
4. Cash Optimization Factor – The indicator gives clarity into how well you’re managing cash. A positive number means you’re collecting money faster than you spend it. You’re less likely to have a shortage when this happens. A negative number means you spend money faster than you collect it. Cash management is trickier when this happens and you’re more likely to face a shortage. To cover a shortfall, you’ll have to put off paying bills, use your line of credit or seek outside funding.
5. Net Profit – One of the reasons you’re in business is to make a profit. Know your bottom line.
6. Gross Margin – Gross margin is the amount of profit you earn on each product or service you sell. It’s important to know you’re earning sufficient gross margin to cover your overhead expenses and leave a fair amount leftover.
7. Total Accounts Receivable – If the total amount your customers owe is on the rise, it either means you’re having difficulty collecting or the business is growing. Consult other indicators, like Net Sales and Net Profit to know which it is. It’s also good to review the detailed Accounts Receivable Aging regularly to really know who owes, how much they owe and how old it is.