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Accounting & Finance

These are the 7 KPIs entrepreneurs must stay on top of to track performance

Posted by Kanika Sinha

July 14, 2021

Being aware of certain metrics, aka key performance indicators (KPIs), can help entrepreneurs better understand their business and build a more successful organization.

Consistently monitoring KPIs will shine a light on which business tactics are effective and which ones are not — and owners can take actions to improve results accordingly. Ultimately, tracking KPIs helps align the company’s people, processes and goals.

But with so many potential KPIs available, knowing which financial numbers to track can be perplexing. We’ve culled a list of the seven metrics that are the most important for gauging business performance.

Operating cash flow

Many businesses with sales of more than a million dollars in annual sales end up seeking bankruptcy. The primary reason is usually the business’ failure to keep its cash position in check.

Regular analysis of the company’s operating cash flow helps owners and management understand their ability to pay for routine operating expenses such as supplies and utilities. When used in conjunction with the total capital employed, this KPI indicates whether operations are generating sufficient cash to support capital investments decisions, providing deeper insight into the business’ financial health.

Working capital

Simply put, working capital is the measurement of the company’s liquidity and short-term financial health. It can also help entrepreneurs discern the operational efficiency of their business.

Calculated by subtracting the company’s existing liabilities from its current assets, this KPI indicates whether a company has the adequate cash flow to cover current obligations — short-term debts and day-to-day expenses.

It may so happen that a company endowed with profits and assets may fall short of its liquidity and thus unable to finance its operational expense or any maturing debt. As assets cannot be readily converted into cash, keeping track of working capital is a must for entrepreneurs to keep their business running smoothly.

Accounts receivable

Account receivable is the balance of payments due to a company for goods or services rendered but not yet paid for by customers. In other words, it is the money that third parties such as other companies, people owe you.

As most businesses sell to customers on credit, it is essential to routinely track accounts receivable to ascertain the company's overall financial health and liquidity.

A step up from this metric is the accounts receivable turnover ratio. This is the rate at which payments due are collected from customers, offering greater insight into business operations and extremely useful when preparing financial projections. Calculated by dividing total sales for a period by the average accounts receivable for the same period, this metric can apprise entrepreneurs about corrections to be initiated in processes including managing receivables.

Gross profit margin

Although it is a good metric for measuring business profitability, some entrepreneurs don’t know what exactly comprises the gross profit margin. Basically, it is the revenue the company has available after incurring direct costs from producing the goods or services.

Here’s the formula: Gross profit margin = (revenue - cost of goods sold) / revenue * 100

Analysis of this KPI helps entrepreneurs evaluate the business’ efficiency in generating profit for every dollar of the costs involved, as well as compare its performance against competitors.

Net income

Net income is the overall profitability, or the actual real dollars made by the business after all expenses and costs are deducted from revenue.

As this metric includes all components of the income statement, it is more inclusive than gross profit and gives entrepreneurs a stronger understanding of the effectiveness of their management team.

Accounts payable

Accounts payable refers to the money to be paid by a business to its suppliers. It is shown as a liability on a company’s balance sheet. In simple words, accounts payable is how much you owe to creditors..

As accounts payable has a direct bearing on working capital, this KPI gives entrepreneurs clarity on the company’s financial dexterity and its relationships with key suppliers.

Employee utilization

This is one of the most-overlooked business metrics. In fact, entrepreneurs should pay more attention to tracking employee utilization, as it is the key to improving profitability.

By definition, employee utilization is the amount of an employee’s working hours that are spent doing billable work. Understanding employee utilization can help organizations recognize how efficiently they are managing resources and in turn make more informed hiring decisions and set fair employee compensation programs.

Authors

Kanika Sinha

Kanika is an enthusiastic content writer who craves to push the boundaries and explore uncharted territories. With her exceptional writing skills and in-depth knowledge of business-to-business dynamics, she creates compelling narratives that help businesses achieve tangible ROI. When not hunched over the keyboard, you can find her sweating it out in the gym, or indulging in a marathon of adorable movies with her young son.

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Accounting & Finance

These are the 7 KPIs entrepreneurs must stay on top of to track performance

Operating cash flow

Working capital

Accounts receivable

Gross profit margin

Net income

Accounts payable

Employee utilization

Authors

Kanika Sinha

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