Dreams and moments of inspiration may inspire businesses, but they don’t grow them (outside of the occasional impactful investor pitch). Money rows businesses. The more you make, the faster you can expand your operation. Your finances aren’t something to be guessed, or even estimated. They must be tracked rigorously, giving you clarity on where you stand. That’s why companies must be able to obtain a finance KPI (key performance indicator).
It’s inefficient (and ineffective) to track every last big data metric, so you pick out the ones that mean the most for your business journey. In this post, we’re going to look at 6 essential finance KPIs that are particularly significant in driving business growth.
1. Cash flow
A core concern for every business, although it is often overlooked, cash flow pits the regular outgoing payments against regular income. If the former outweighs the latter, the result is a negative cash flow, which is extremely dangerous. If the latter exceeds the former, that’s positive cash flow, which is good.
Keep in mind that cash flow is distinct from matters of profitability. A business can be profitable but still run into cash flow problems due to expected income being delayed to the extent that cash reserves run dry and payments start being missed. If a company has yet to achieve reliably-positive cash flow, it’s not in a position to grow.
2. Ageing accounts receivable
What happens if your cash flow isn’t looking so great? You need to investigate all the payments coming in and going out to discover where things are going wrong. When you do so, one of the most useful metrics you can look at is ageing accounts receivable. This metric refers to pending income that has been considerably or repeatedly delayed. For instance, you could factor in only the payments that are a month or more past their deadlines.
If the figure doesn’t amount to much, then this finance KPI suggests that you’re just not bringing in enough payments, and the problem isn’t really with your scheduling. If it comes to a significant figure, it shows that you need to work harder to push clients for prompt payment. You may also have an issue with your invoicing. In such a case, an accounting tool might make your life easier.
3. Monthly recurring revenue
Put simply, monthly recurring revenue is the aggregate of all the revenue that you can count on receiving every single month. You don’t need to chase it, and it doesn’t fluctuate significantly. This revenue is just there, month after month, typically on the same day.
The best example of something that produces monthly recurring revenue is a monthly subscription to an online service such as Netflix or a SaaS tier. In these cases, a subscriber pays a certain amount, often automatically, every month, and the recipient knows it’ll be there.
This finance KPI is especially important for the growth of a business because it provides stability. It’s hard to grow when you’re not sure how much money you’ll make next week or next month. If you can reach a certain level of monthly recurring revenue, it can serve as the foundation of your business.
Once you are aware of your monthly recurring revenue you can schedule a variety of automated processes, such as regular payroll using a system like Wave, and save significant time and effort. This opportunity, however, is only possible if you fully understand this finance KPI and you are certain that the periodic revenue will cover your automatic payments.
4. Cost per acquisition
In the context of business, cost per acquisition is how much you spend on creating a new customer. It’s most commonly used in the e-commerce world, but it’s meaningful for any business.
The simplest way to calculate is to add up all your marketing and sales spend and divide it by the number of customers brought in by your marketing work. The lower you can get your cost per acquisition (relative to the revenue the average customer generates), the more you can achieve with a set marketing budget, and the more profitable your business will become.
5. Customer lifetime value
This finance KPI is particularly important when used in tandem with cost per acquisition. Your customer lifetime value attempts to predict the ultimate return on investment of the average customer. For a growing business, it typically looks at how customer spend fluctuates over time and uses the average duration of a customer’s patronage to calculate the total revenue it will generate.
Why is this so important? Because the customers that have high lifetime values need to be high-priority targets. By catering to the most important customers, for the most part, a growing business can make the most of its budget and win brand loyalty that will pay off even further through referrals.
6. Net profit margin
One of the most basic metrics, but absolutely essential, the net profit margin straightforwardly takes your total revenue and subtracts all your expenses to arrive at the pure profit. The greater the disparity, the healthier your company is. As noted earlier, profitability isn’t everything, but it is, by far, the most important thing for the long-term health of your company.
If you’re not making money, you’re almost definitely losing it, and you can’t endure that for very long. You certainly can’t grow a business in such circumstances. If you’re not making any profit, investigate why. Perhaps your prices too low to cover the costs? Your costs are too high to make your product affordable? Figure out the problem, then work on finding a solution.