Key metrics for your small business
In management accounting, we often talk about Key Performance Indicators (or KPI). These are measures of business performance which catch the essence of how a business is doing. Choosing the right KPI is not an easy task, even for a business with accountants on the payroll. This leaves it tough on smaller businesses, who probably have little expertise in this area. Having said that, there are a number of key things you might focus on as a small business.
The first is cash, without it you are snookered. Accountants often refer to liquidity issues, meaning a business cannot generate enough cash. Liquidity issues lead to solvency problems, meaning you can’t pay debts as they fall due. Traditionally, accountants will tell you need the ratio of cash and receivables to payables to be about 1:1. To make this sort of metric even easier, why not think about it like this:
Cash in the bank/Monthly cash requirements = number of months until cash runs out.
You could easily work this measure out at any time and try to collect debts from customers before you run out of cash. If you have a bank overdraft which is within its limit, you could quickly alter the above to figure out how long until you hit the overdraft limit.
A second key metric is your cost structure. You could regularly compare you costs as a portion of sales revenue. Keeping a tab on this might help prevent cost overruns over a period of time. So if you see sales drop off, are costs remaining the same?
Finally, think beyond the traditional financial measures. Try to think of what it is that keeps your business ticking over. The key metric(s) here will vary by business but you should consider things like:
- number of new sales enquiries
- number of customer complaints
- how efficient is your production and/or purchasing
- what’s your market share.
- sales revenue by customer/product or segment