5 Essential KPI’s to keep your business in the black

Accounting can never be described as the most colourful of professions. There are three main colours – black, red and yellow. In business, black is always the new black. You want to avoid red and especially those blazing yellow warning signs. In order to avoid all shades of red and yellow, you need to focus on the numbers regularly. The problem that a lot of business owners encounter, is that the accounts tend to build up while the business keeps doing what it does.

Accounting can never be described as the most colourful of professions.

To get out of this cycle of accounts building up along with the accompanying groans when you see the paperwork pile up, is to do regular maintenance work on the financials.
I’ve broken down the arduous task of maintenance to a number of daily, weekly, monthly, quarterly and annual Key Performance Indicators (KPIs). These checklists will make it easy for you to main focus and keep your business in the black.

Here are Five key KPIs to track:

KPI #1: Sales growth margin

Measuring your sales growth is imperative. By that I mean analysing your sales in a number of ways – how you compare month by month, year on year and of course actual versus forecast.
One thing I would recommend from the start is that you measure your sales as your financial statement lays them out. So for example if you sell computers, consumables and training, split out your sales forecast into each of the relevant three categories. This way, it will be easy to track and measure individual sales per profit centre area.
Your sales forecast determines a lot about your business for the upcoming year. Your expenditure is typically based on it, which is why you need to keep measuring sales. If you’re not getting the sales as predicted, then you need to adjust your expenditure.
Measuring historic sales versus current sales allows you to identify dips or trends that are happening right now so you can make changes either immediately or monthly/quarterly etc. Either way, you’re making an informed decision.

KPI #2: Gross margin

This is one that tells you whether you are pricing your goods or services correctly and is the starting point toward achieving a healthy bottom line net profit. The margin should be enough to cover fixed expenses, in particular your costs associated with making the product or delivering the service.
Gross Profit Margin: Total sales – Cost of Goods Sold divided by Total Sales

KPI #3: Net pro it margin

This is the grand-daddy of all metrics. This is key to understanding how good a company is at converting revenue into profits. It’s your bottom line remaining after all operating expenses, interest and taxes etc have been deducted.
Net Profit Margin: Net Profit divided by Total Revenue.

KPI # 4 : Debtor days

Debtor days are essential to know as they feed directly into your cash flow projections. They tell you how long it takes your customers or clients to pay. Most accounting software packages will calculate this for you automatically so you’ll know your average overall and also the client or customers’ average number of days.
It’s also good to know how you compare to your industry. If you give 30 days credit, but others are only giving 15 or 45, then you can adjust your policy or terms and conditions.
Knowledge allows you manage the collection and your cash flow.

KPI # 5: Current ratio

Another really good metric to measure is the ability of your organisation to pay your debts over a given period of time.
This is useful when planning any growth in your business –
whether it’s expansion or simply buying extra stock.
Current Ratio: Current Assets divided by Current Liabilities.
The resulting number should ideally fall between 1.5 and 3. Below 1 means you don’t have enough cash to pay your debts.
To summarise, keeping an eye on these KPIs will keep your business in the black. It’s that simple.