The 5 Most Important Financial KPIs That Drive Business Strategy
July 20, 2018
You understand how to devise goals and a business strategy, but what financial KPIs do you use to inform your strategy?
You have a firm handle on the day-to-day running of your business and know how to get things done. But, you also know that getting things done isn’t enough: The long-term success of your business depends on big-picture thinking, grasping financial KPIs and acting like a CEO.
More importantly, it depends on:
- Having clear goals. You may, for example, have the goal of becoming the leading content marketer in your country.
- Stating measurable goals and crisp objectives. You could mention that you want to achieve “X” amount of revenue in the year.
- Building a strategy to help you achieve these goals and objectives. Your strategy is the map that guides your business and helps answer critical questions:
- Who are you going to target?
- What is your competitive advantage?
- What services will you provide?
- Listing tactics that form part of your strategy. For instance, to become a leading content marketer you may decide to build expertise by publishing thought leadership articles on LinkedIn.
The Importance of KPIs and Business Strategy
When it comes to tracking your business day-to-day, there are certain financial KPIs you should take pulse of. These include cash flow and even outstanding revenue.
While these KPIs may also inform your strategy, you might want to broaden your horizons and look at other financial indicators that inform your long-term strategy.
After all, KPIs help you measure here and now, but may not always show you unexplored opportunities or a longer-term picture.
So, besides tracking the KPIs that help you measure performance today, look at the following KPIs that will help you think and strategize like a CEO.
These metrics will help you:
- Determine whether (or not) you’re on track to reach your financial goals
- Evaluate the success of your strategy based on these key metrics
- Pinpoint areas in your business that may need improvement
- Identify any opportunities and challenges
- Assess whether your customers are happy or not
What Exactly Are the Most Important Financial KPIs That Inform Business Strategy?
Financial KPIs will vary from business-to-business, depending on your goals. However, we’ve identified five of the most important and most common ones that you should – at least – be tracking to ensure your business is on the right track.
1. Revenue Growth
Sales growth is one of the most basic barometers of success for any business. You can calculate revenue growth in three simple steps:
- Track sales (and compile income reports with your favorite accounting software) from one period to the next
- Subtract the previous period’s revenue from the current period
- Divide that number by the total of last period’s revenue
You’ll get revenue growth expresses as a percentage. The goal is to aim for positive growth. Negative growth tells you something is wrong and that you need to take corrective action.
For example, it may be that customers aren’t interested in buying your product or that you need to change the way you get clients.
2. Income Sources
You should also analyze your revenue streams: Revenue per client and service. This analysis will help you:
- Determine profitable customers and segments. For example, imagine you’re a copywriter who finds that the majority of your income comes from writing ebooks.
- Make informed decisions that will help you grow your business. Knowing that ebook writing is lucrative, you should look at marketing that service more aggressively (if you aren’t).
Pro Tip: To analyze your revenue streams use cloud accounting software – like FreshBooks – that provides at-a-glance summaries of your income streams.
3. Revenue Concentration
Tied closely to revenue sources is revenue concentration. The goal is to ensure that most of your revenue isn’t coming from one or two clients.
If this is the case, you should take immediate action to diversify your client portfolio to protect yourself. Why? Well, if you lose that client, there will be a massive hole in your monthly income, with you scrambling to find extra clients.
For example, I analyzed my own business and found that more than 80% of my income was coming from one client. To address this situation I’ve started to market myself even more to get more clients.
You can easily do this analysis yourself with a few simple calculations. Simply divide the revenue per customer by your total revenue and times it by 100. For example, imagine your total revenue is $32,400 and spread among five clients:
- Client 1: $3,400
- Client 2: $2,300
- Client 3: $19,500
- Client 4: $3,0000
- Client 5: $4,200
Your revenue concentration will be (rounded off to the second decimal):
- Client 1: ($3,400/$32,400)*100 = 10,49%
- Client 2: ($2,300/$32,400)*100 = 7,01%
- Client 3: ($19,500/$32,400)*100 = 60,19%
- Client 4: ($3,0000/$32,400)*100 = 9,26%
- Client 5: ($4,200/$32,400)*100 = 12,96%
4. Profitability Over Time
You also need to look at your expenses to see what’s draining your financial resources. By tracking your expenses and income, you can then compile profit and loss reports, (through deducting expenses from income) to analyze your business performance over a period.
Then you can make important decisions such as:
- Should you cut your costs? Review your expenses to see where your money’s going.
- What costs should you cut? You likely have certain expenses you overpay on. You can cut and reduce these expenses in a few simple ways to instantly save money for your small business.
- Should you raise your prices to increases your net profit margin? Net profit margin is profits left over that you can reinvest in your business.
- Should you look for more – and better – clients? You may not be getting paid what you’re worth with existing clients. So, find better ones who are willing to pay you well.
5. Working Capital
Part of thinking like a CEO involves planning ahead so when the time comes you can take advantage of big opportunities.
If you’ve ever had a dream client come knocking, but are unable to take advantage of the opportunity because you don’t have enough cash to invest in the project, then it’s time to keep tabs on your working capital.
Working capital is simply that money you would get from a bank loan or family and friends to help you fund your day-to-day.
But, you can also use it as a buffer to tide you over when clients take forever to pay you and to capitalize on those big projects that will push your business over the edge.
Calculate Working Capital
To calculate working capital, take current liabilities and subtract it from current assets. If you have more assets than liabilities, you’ll have positive working capital and vice versa.
To help you determine if you have enough, calculate your working capital ratio or current ratio: Current assets/current liabilities. You’ll want to aim for a ratio of between 1,2 and 2.
But here’s the thing: Making your working capital and working capital ratio calculations at different periods doesn’t tell you much about your future working capital needs.
What if there was a way to quickly calculate how much working capital you needed on a per project basis?
Well, there is! We show you how to do it in the ebook: “Don’t Wait to Grow Your Business: Unlock Your Growth Potential With Working Capital.”
You’ll learn everything there is to know about working capital:
- Why you need it
- What it is
- How to calculate it
- How to determine how much you need
- How to get it
We’ve also thrown in a case study of a small business owner who – thanks to working capital – managed to take advantage of her most significant opportunity yet. She would eventually go on to sell her company for over a million dollars.
So, grab your free copy today to help you start thinking like a CEO, and unlock your true growth potential!