I get it, you are just new in this business, and as a busy mom, reviewing the finances every now and again is not the most exciting thing that you do in your business. In fact, many people avoid looking at important financial key performance indicators for their business, because they are afraid of the reality that these indicators will show about their business.
The tough news is that you are going to have to learn how to use numbers to grow your business and make key decisions. So this post series is for you if you are still trying to figure out the what, why, and how to use financial numbers to make better business decisions.
Financial key performance indicators are simple ratios or percentages or actual figures that businesses use to measure their financial health. If you are not monitoring your finances closely, as I mentioned in this post, you could end up making decisions that not only hurt your business in the long run, but also don’t make sense.
Here are my top 9 financial key performance indicators (KPIs) that you can start tracking today in your business!
1. Profit margin:
The profit margin helps to compare the performance of your business to the past, and to other competitors who post their financial performance regularly. Having a targeted margin will help in assessing how attractive potential new services and products are, as you should be able to calculate an expected profit margin for each product if you know how much expenses and revenue you expect from it.
Profit Margin = Profit / Total Income
2. Expense margin:
This determines how much of your income you are using to pay for expenses. A higher expense margin means that you are using a lot of sales revenue to run your business. Generally, your expense margin should not change significantly over the year unless your business model has changed. Keep an eye over your expense margin, so that you are not overspending in your business.
Expense margin = Expenses/ Total Income
3. Cash on hand:
This determines how much cash you have at any given time. You should have enough cash to pay for 6-12 months of overall expenses.
Cash on hand = Available cash to business (Cash + Petty cash + Bank current accounts)
4. Burn rate:
This determines how fast a company uses its money to cover its expenses. It is usually interpreted in months, as an indicator of how long a company can continue running if there were no sales or income coming into the business.
Burn rate (in months) = Cash/ Monthly expenses
5. Return on equity
This determines how much you have earned from the investment you have made in the business. This rate is usually very low or even negative in the first 3-5 years of a business.
Return on Equity = Profit / Equity
6. Working capital
Working capital measures the amount of capital that a business uses to continue running its daily activities. The higher this amount, the more upfront financing will be required to operate the business. Working capital is usually calculated by considering the company’s current assets and liabilities. A ratio above 1 generally indicates that the business is in a good position.
Working Capital = Current Assets / Current Liabilities
7. Conversion rate
This determines how many people eventually buy your product or service after seeing your promotion or visiting your website. In online businesses, anything between 3 and 5% is a fairly good conversion rate.
Conversion rate = Number of buyers/ Number of visitors on page
8. Revenue per customer
This is an important financial key performance indicator because it tells you how much revenue you make for each customer. It gives an average figure of the shopping basket size, every time a customer buys from you. You can use this ratio to determine how many new customers you need to target using your marketing efforts, in order to meet your sales targets.
Revenue per customer = Monthly total sales / Number of customers
9. Cost of customer acquisition
Cost of customer acquisition measures how much it costs in marketing to attract and get one customer to buy from you. If you use Facebook Ads, it provides a summary of the cost per conversion, another way of saying what the customer acquisition costs are.
Cost of customer acquisition = Total marketing spend/ Number of customers
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