Financial KPIs That Grow Your Small Business
Written by Bindi Gethen
When it comes to running a small business, the pressure to succeed is often measured in numbers: percentages, margins, ratios. I get it. As someone who’s worn many hats – the CEO, HR manager, marketer, customer service reps, and occasionally, the janitor – it’s easy to feel consumed by everything that comes your way.
Each of these roles comes with its own set of metrics to worry about. But as a business owner, you should definitely fixate on financial key performance indicators (KPIs).
So what are the most important financial KPIs for a small business? Some top financial KPIs are sales revenue, gross profit margin as a percentage of sales, cash flow, conversion rate, cost of goods sold (COGS), customer acquisition cost (CAC), and employee retention rate, among others.
Important Financial KPIs for Small Business
Financial metrics are the compass for your small business, guiding you toward profitability and sustainability. In this guide, we’ll break down the essential financial KPIs you need to track. Let’s cut through the noise and focus on what truly matters for your financial success. Welcome to your crash course in the KPIs that make or break small businesses:
1. Sales revenue
Sales revenue is the total income generated from the sale of goods or services. It serves as the most direct measure of business success and forms the basis for various other metrics like profitability and growth rates. It’s often the first line item on your income statement.
When you see that revenue number climb, it’s not just “business doing well”; it’s a validation that what you’re putting out into the world is making someone’s life a little better or a little easier.
Pro tip
If your sales revenue is fluctuating or declining, don't just chase discounts or flashy marketing. Understand why. This metric is a mere signal for you to pivot, adapt, or even dig deep into understanding your audience's unmet needs.
2. Gross profit margin as a percentage of sales
This KPI represents the percentage of total sales revenue that exceeds your COGS. It helps assess the financial health of your core business activities, without factoring in operating costs like wages and rent.
If you want to attract a higher-margin customer base, you might opt to introduce premium versions of your products or perhaps conduct a cost analysis.
The most important part here is to figure out which pricing strategy is best for your business.
Pro tip
Are your margins too thin? Before slashing costs, consider ways to add value that will allow you to raise prices without alienating customers. Sometimes, a small increase in price backed by a significant boost in value can significantly enhance your gross profit margin.
3. Cash flow
Positive cash flow allows your business to move, grow, and even rest when needed. On the contrary, cash flow problems are often the first signs of underlying issues. Maybe it’s a blockage in accounts receivables, or perhaps it’s an overspend in marketing. Either way, it calls for immediate action, not panic.
Pro tip
Use a 13-week rolling cash flow forecast to keep your finger on the pulse. This forecast can help you spot potential problems well in advance, giving you the time to course-correct.
4. Conversion rate
This is the percentage of interactions that result in the completion of a desired action like a sale, helping you gauge the effectiveness of your lead generation and marketing efforts. Some brands like to do A/B testing, customer journey mapping, and identifying bottlenecks through web analytics.
Your conversion rate tells you how many prospects went from “interested” to “commitment”. When you examine your conversion rate, you’re essentially asking, “How good am I at turning curiosity into action?” If you’re reaching your sales goals, then that’s a testament to how well you’re able to communicate that you can provide value to the point that someone is willing to part with their hard-earned cash.
Pro tip
Do A/B testing regularly to refine your customer's journey from interest to conversion. Consider each piece of data as a clue, telling you how to make that journey as fulfilling as possible for your customers.
5. Cost of goods sold (COGS)
COGS refers to the direct costs attributable to the production of the goods sold in a company. It also directly impacts your profitability and has tax implications. Companies typically invest in technology or training that can make their production process more efficient.
Related articles:
Small Business Tax Deductions in Australia
The Complete Guide to Getting a Business Loan
Pro tip
Conduct a thorough vendor audit at least once a year. Negotiating even a small percentage off your raw materials or production costs can have a dramatic impact on your bottom line.
6. Customer acquisition cost (CAC)
CAC tells you how effectively you’re attracting people into your circle. But don’t mistake this for just another expense line on your P&L. It’s much more nuanced than that.
High CAC can quickly eat into profits, making your business model unsustainable in the long run. It’s also a signal that you might be trying too hard.
A low CAC could mean you’ve hit that sweet spot, or it could mean you’re not investing enough to truly wow your potential customers.
This financial KPI is a constant balancing act, a dance between effort and outcome, between investment and payoff.
Always compare CAC to Customer Lifetime Value (CLV) to ensure a sustainable relationship.
Pro tip
Diversify your customer acquisition channels. Don't put all your eggs in the social media marketing basket. Explore organic, referrals, and partnerships to find the most cost-effective avenues for sustainable growth.
7. Employee retention rate
A high employee retention rate generally means you’ve created a workspace where people feel valued, challenged, and aligned with the company’s mission.
A lot of business owners realise too late that employee turnover is expensive due to the costs of recruiting, training, and the lost productivity in the interim. Some actionable strategies you could use to improve your retention rate are engagement surveys, career development programs, and competitive compensation.
Related articles:
Should a Small Business Use a Bookkeeper All Year Round?
Bookkeeping Services for Small Business: What It Can Do for You
Pro tip
Invest in your employees' continual growth through training and mentorship programs. A sense of progress and achievement can turn a transient job into a fulfilling career, significantly impacting retention.
It’s impossible to monitor every single financial metric
Here’s the reality check: It’s just not feasible to keep an eye on every single financial number that crosses your path. Your attention is a finite resource. Trying to micromanage every KPI is akin to trying to remember the names of every character ever introduced in “Game of Thrones.” Focus on what genuinely moves the needle for you. Less is more, especially when “more” turns your life into a cacophony of spreadsheets and anxiety.
You didn’t become an entrepreneur to moonlight as a bookkeeper. At this juncture, you might want to consider outsourcing your financial housekeeping to the professionals here at The Bookkeeping Studio. We want to give you the freedom to run your business with the peace of mind that someone is watching those critical numbers, so you don’t have to. Let The Bookkeeping Studio handle your business finances today.
Hey, my name’s Bindi Gethen! I’m the founder of The Bookkeeping Studio in Australia. With over 15 years of experience in the industry, I have a deep understanding of the challenges that small and medium-sized business owners face when it comes to managing their finances.
I am passionate about empowering my clients with the financial information they need to succeed. My team and I pride ourselves on our commitment to exceptional value, accuracy, and confidentiality. Our virtual bookkeeping services include payroll, budgets, and management reporting, among others.
Not to toot our own horn, but we can assure you that you won’t find a bookkeeping partner like us anywhere else in the Southern Highlands.
