Episode Transcript
[00:00:00] Welcome to another episode of financial Snickens. I'm your host, Alisa McCabe. And today we're continuing our series on financial reporting. Today, we're going to be talking about setting and tracking key financial metrics. Uh, sometimes these are called key performance indicators or key results, areas, KRAs, whatever you call them.
These are numbers that you should regularly monitor and it helps you gauge the financial health. And performance of your business. So we are going to talk about what, why you should track these key performance indicators and what you need to know about them and how to regularly monitor them to assess the health and performance of your business.
So why do this? Financial [00:01:00] metrics provide you a road map of where you're going. It helps to keep you on the road. It's like signs that you can see, am I staying on the road? So you have a goal and you've started this road, going down this road and these KPIs, these financial metrics tell you that you're still on the road, that you're still going in the right direction.
It can also help you identify some challenges that are coming up. So, maybe you have to, uh, reallocate some resources or change a strategy. And it helps you to understand, um, when these things happen, what you can do to get back on that road. So, what are these essential financial metrics for small businesses?
The number one financial metric is revenue [00:02:00] growth and you calculate the percentage of revenue, the increase in revenue over a specific period, whether it's over month over month, year over year and consistent growth is a positive indicator of business health. We track this number in our business. We track how much we are growing year over year.
Quarter over quarter. Um, and we do this on a regular basis. So each quarter, we compare it to last quarter. And at the beginning of a year, we set aside what we, what our goal is, what our revenue growth goal is, and then we track against that. So if we're not on, on target, if we're not down that road going towards our revenue growth.
Then we know we need to make adjustments. So we are constantly checking against that number. We have had year over year, we've had 20 percent growth every year, [00:03:00] and we continue to have that number and we check our margins against it. Which brings me to gross profit margin, gross part profit
margin, evaluates the percentage of revenue retained after subtracting off the cost of goods sold and a healthy gross profit margin margin ensures profitability.
This is a number that we look at in our company, typically in service. Companies, you don't use them, but we consider the work that we do and our team cost of goods sold. So our profit margin also gets measured and it is good to understand because when that number gets bigger or smaller, it helps you to make decisions based on what your goals are.
So you're operating expenses. A portion of your operating expenses,[00:04:00]
operating expenses is another number you want to keep looking at. The percentage of operating expenses, it's a percentage of income, and you want to monitor this to control costs and maintain profitability. So you take what your percentage of expenses.
You take what percentage of your income is being given to operating expenses. Every industry has a number. So you might be at 20 percent or 30 percent or 40 percent of your income is going to go directly towards operating expenses and you want to maintain that number. And you know, if you start to deviate from it, you are going off the road and you need to take corrective measures.
Another key performance [00:05:00] indicator and something you need to look at is a cash flow forecast. So these projections anticipate cash flow fluctuations. This KPI is crucial for ensuring ongoing operations and planning for future investments. Accounts receivable turnover. This can sometimes make or break a company.
It measures the, it measures the efficiency. Of collecting money if you have a high turnover. That means it happens quickly. It means that you are managing your accounts receivable. So, if you are not collecting on your invoicing, and it's taking 30 6090 days. That the longer that that turnover happens, the less likely you are to be having a good cash flow and [00:06:00] to be making a profit.
This is where I see most business owners get into trouble. They do the work, they invoice their clients and they don't get paid timely. Put mechanisms in place so that you get paid quickly for your money. Another important KPI is customer acquisition costs. Well, how you do this is you calculate the cost of acquiring a new customer and monitoring this number ensures that the marketing efforts.
Align with your revenue generation. Another favorite is lifetime value of a customer. Determine the total revenue a customer is expected to generate over their entire relationship with your business. LTV, which is lifetime value, helps in customer retention strategies. Having, keeping a customer is [00:07:00] much less expensive.
Then gaining a new customer and those two numbers, the client, the customer acquisition cost, CAC and the lifetime value of a client LTV. There's great software out there that can calculate this for you. Uh, one of the ones we use is tally street and I love them. They do a great job at this and another number that.
It really has some value. There's a little controversy about it, but I have found it to be quite useful. It's the net promoter score or NPS. It measures customer satisfaction and loyalty. A high NPS net promoter score indicates a strong customer base likely to promote your business. And there are, there's so much software out there that can do this for you.
You can do it simply [00:08:00] through a Google form and send it to your clients. This helps you to know how satisfied your clients are and their level of loyalty. If it's an eight, nine or 10, you're doing great. Anything below that, you either have to work on it by the client. So as I was just mentioning, how do you set these things up?
How do you do this? So. You can invest in financial software. Like I was saying, Tally Street, QuickBooks Online can track a lot of these, and they can give you real time updates, and you can create a customized dashboard for easy monitoring, and then you need to regularly review this. Um, a lot of these things are easy as long as you have some accounting software, there's these add on apps that can have all this information for you.
You can and then you need to decide when you're going to look at it. Are you going to look at it monthly? [00:09:00] weekly, quarterly, yearly, or maybe you look at all of them. It is really helpful to continue to monitor it, monitor these KPIs and monitor them regularly. Once you have something set up, I can't tell you strongly enough to set up something that's easy.
If you do a, uh, spreadsheet and you, it takes you too much time to set something up or it's really hard to do, you won't continue to do it. Find something that is simple for you to understand and that can be done easily. That will make sure that you're, you're getting a system in place and it will create that habit to look at these numbers on a regular basis.
So. Also, in addition to looking at the KPIs, you need to regularly review your financial statements, your profit and loss, and your balance sheet. Check those out and make sure what's happening on your KPIs is also [00:10:00] being reflected there. The income statement and the balance sheet are the basis for the information for the KPIs.
And after after listening to all this, I hope I'm inspiring you to look at these key financial metrics and take a proactive approach. It helps you to navigate the complexities of being an entrepreneur. And by regularly monitoring these KPIs, you can gain comprehensive understanding of your business, your financial health and the performance.
And it helps you to stay on track. That's what this is all about. And it's a. And it's creating hopefully a simple way that you can do that without having to go too deep into the numbers, but by looking at the indicators along the way that will help you stay on that path for sustainable growth and prosperity.
If you want to talk [00:11:00] more about. If you want to talk more about key performance indicators, head over to my website, firststepsfinancial. com, and we can chat more about what you should be looking at and what's an easy thing to measure to make sure you're on the right path.
