Key Performance Indicators (KPIs) and Their Role in Small Business Finance

May 29th, 2023

How well is your small business performing, financially speaking?

Do you have the numbers to answer that question?

Key performance indicators (KPIs) are essential metrics for measuring many facets of business success, and they can be useful in assessing the financial health of your small business, too.

A key performance indicator is any set of quantifiable measurements used to gauge some sort of progress, from something as small as an individual project’s goal to something as large as a company’s overall success.

The following are some relevant small business financial KPIs, and why you should be tracking them.

13 Important Small Business Financial KPIs

Below are common and critical KPIs, but some might be more relevant than others, depending on what kind of business you operate.

1. Average In-Store Transaction Value: A very simple metric that boils down to how much a person spends when they’re in your store. Your accounting software, if it tracks transactions, should calculate this automatically. But if not, simply take your revenue over a certain period and divide it by transactions made during that period.
2. Cash Flow: Net profits, which we’ll get to momentarily, is more a function of accounting. But cash flow is how much cash is actually flowing in and flowing out of your business. Operating cash flow (OCF) is cash from sales minus operating expenses paid in cash. Free cash flow (FCF) is OCF minus capital expenditures (capex).
3. Cost of Goods Sold (COGS): Cost of goods sold details how much your business is paying to actually sell your products or services. These costs can include labor that produces or sells the good or service, raw materials, products you are reselling, and more.
4. Cost Per Engagement (CPE): Cost per engagement is an advertising and marketing metric. Effectively, this is how much you are paying for an ad that a customer has engaged with.
5. Customer Acquisition Cost (CAC): Customer acquisition cost is how much you spend to ultimately get a customer to make a purchase. This is an important metric for determining how profitable your customers are.
6. Gross Profit Margin: Another metric of financial health where cost of goods sold is subtracted from revenues, then divided by revenues. The resulting percentage is the gross profit margin.
7. Inventory Turnover: This describes how quickly (or slowly) inventory is being sold and replaced. The higher the ratio, the stronger sales are. Calculate this by dividing cost of goods sold over a period of time by average inventory.
8. Net Profit: Net profit is what your business ultimately earns once all expenses (cost of goods sold, expenses, depreciation and amortization, interest and taxes) have been subtracted by revenues. If you are not profitable, this is referred to as a “net loss.”
9. Revenue: One of the most basic financial KPIs. Revenues are simply how much money you bring in by selling your goods or services.
10. Revenue Per Employee: Revenue per employee describes how much, on average, each employee generates, calculated as revenues divided by number of employees. This is something of a measure of productivity, but understand that this metric is highly dependent on industry. A technology company, for instance, will almost certainly have much higher revenue per employee than, say, a bakery.
11. Revenue Per Visitor: This is an e-commerce metric that describes how profitable each visitor is to your site. (Note: This factors in both paying customers and customers who have not taken any actions.) Calculate this by dividing revenues by the number of site visitors over a certain period.
12. Sales Per Square Foot: Sales per square foot is an important financial metric for brick-and-mortar businesses. Simply divide revenue over a period by the total number of square feet for a single location or the total business. This metric includes not just selling space, but non-selling space such as fitting rooms and stock rooms.
13. Upsell Rates: Many companies will “upsell” additional goods and services to boost both revenues and profits. Upsell rates detail the percentage of customers that buy more than they initially intended.

What KPIs Are You Using?

Do you know how you should measure your own small business’s finances? If you don’t know … ask.

McManamon & Co. serves small- and midsize businesses in many ways, including a wide variety of accounting services. We work closely with you to create financial statements, maintain records and provide expert guidance on financial accounting matters. And we can help you better understand the KPIs that matter most for your growing company.

Want to know more? Call us at 440.892.8900 or contact us online today.

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