Small business owners know that to be successful, they need to closely manage their growing business. Unfortunately, as small businesses become more successful, many owners find they are saddled with additional tasks and can feel more removed from its operations.
Key performance indicators are a great way for small business owners to track and measure their short and long-term progress and goals.
Measuring the performance of your business gives you vital information about how you're doing and strategies for growth. It can also highlight important money-saving and tax-saving strategies.
Below are some key performance indicators small business owners should measure to ensure your long-term success.
1. Revenue Growth Rate
Revenue growth is a fundamental key performance indicator that shows you how well sales are going.
To determine the revenue growth rate, subtract the most current period’s revenue by the revenue from the previous quarter or same prior-year period. Then, divide that number from the prior period.
For example, say your small business generated $50,000 in the first quarter of the current fiscal year and $45,000 in the first quarter of the prior fiscal year:
$50,000-$45,000 = $5,000 ÷ $45,000 = 0.11%.
In this scenario, first quarter revenue increased 11% year-over-year.
Keep in mind, the revenue growth rate only looks at how much revenue you are generating month-over-month or year-over-year and does not account for costs associated with expenses.
2. Gross Profit Margin
If you run a business, chances are good you want to make money at it.
The gross profit margin is the best profitability ratio you can use to assess the financial health of your business.
To determine the gross profit margin, take the total revenue and subtract the cost of sales (labour and manufacturing) and then divide by the total revenue.
The number will be a percentage out of a hundred; the higher the number the more efficient you are at generating profit for every dollar of labour cost involved.
3. Monitor Your Cash Flow
Another key performance indicator that measures the health of your small business is cash flow.
Cash flow is money that flows in (sales) and out (total expenses) of your business in any given month. A cash flow forecast helps project how much money will be coming in and out of the business.
Monitoring the cash flow will also shine a light on any potential shortfalls and give you time to cut expenses or secure financing.
4. Return on Capital Employed
Return on capital employed (ROCE) is a key performance indicator that calculates a company’s efficiency and profitability of the company’s total capital investments.
This allows small business owners to see how well their company is using its equity and debt to generate a return.
For a small business to remain competitive, the ROCE (which is expressed as a percentage) should be higher than the cost of capital. If not, the operational costs will eventually reduce profits.
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It doesn’t matter if you run a Fortune 500 company or run a small business out of your home, to succeed, you need to generate revenue, manage your finances, and have a long-term strategy.
Not only are key performance indicators important at helping you get an overview of your business, it is what customers and banks will use to access the performance of your business model.
To help prove the profitability and financial health of your small business, contact the tax and financial planning experts at FBC.
For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.