How to measure small business financial success
Running a small business can be challenging and keeping ahead of purchasing, sales, production and finance is enough to make any business owner feel overwhelmed. However, carrying out a frequent assessment of financial well-being is essential to the success of any business.
But what are the key KPIs to measure small business financial success? Here are some we feel are the most important…
It is crucial to monitor cash flow and measure it against any outgoings. As a KPI, it should be weighed against capital in use, depending on whether the company is financing capital investment from cashflow or employing capital to advance the firm. This kind of ratio analysis will enable businesses to look beyond a simple profit forecast in determining what timescale may be required for further investment.
Using software, such as Soldo, can aid finance departments with monitoring real-time data on expenses, this will allow for greater accuracy when managing the business’ cash flow.
A simple analysis of assets and liabilities will give a base figure and includes cash in hand, receivables and any short-term investments. This is a fundamental KPI, providing an accurate view as to the health of the business in comparing assets with liabilities.
The current ratio is another crucial indicator and one which is often ignored in smaller businesses. By dividing assets by liabilities, companies will have an idea as to how solvent the business is. This indicates the firm’s ability to meet commitments while maintaining a good credit rating in support of any potential expansion plans.
Return on Equity
Many worker-shareholders disguise the health of the company by taking less out of the company to maintain its profile. This is a mistake as it will affect the future worth of the business. This KPI is a tough one to take on board but is essential if business owners want to be honest with fellow shareholders as to how well the company is performing.
Debt to Equity
This ratio considers the shareholders’ net worth against the total liabilities of the company. This KPI will help to explain if the company is using the shareholders’ investment wisely to promote growth. It indicates profitability and allows investors to understand the debt accrued in pursuit of profitability.
An accounts payable turnover ratio gives a snapshot as to how a business is fulfilling its payments to suppliers. It involves dividing sales costs by accounts payable over a similar period. It is a highly valuable form of measure when accumulated over a series of accounting schedules and will ensure that a business maintains strong relationships with suppliers.
Accounts receivable is a crucial indicator representing how well a company is at collecting a debt. The KPI is the result of dividing sales by accounts receivable for the same period. It will flag any issues with collecting income and indicate whether or not there is a need for adjustments.
The Quick Ratio KPI measures the use of liquid assets to meet any short-term financial commitments. It indicates company well-being in terms of wealth and its ability to meet financial responsibilities. It does not include an asset inventory, making it a conservative indicator but accurate nonetheless.
KPIs are a great way of keeping track of company finances. However, it is essential to remember that one size does not fit all and companies should choose KPIs reflective to the nature of their business and its strategic goals.