If you’re asking the question, “How can I better understand the real time financial picture of my business?”, it means that you are one of those business owners who look at your books more than once a year. So, kudos to you.
There are a lot of small business owners who only look at their books on a quarterly or yearly basis, but it’s really important to look at your numbers at least monthly, weekly is even better. The difference here in looking at your typical financial reports is that they are only showing basic financial data and giving you a snapshot of where your company is currently at. There’s no comparison to know really how good or bad those basic numbers are.
In order to understand the real time financial picture of your business, you need real time financial data on key aspects of your business.
Key Performance Indicators
As a business owner you want to be on top of your KPI’s. A Key Performance Indicator is a quantifiable measurement that shows how effectively a company is achieving key business targets or objectives. In other words, KPI’s are key numbers that help you understand the financial picture of your company.
To help you understand a little more, KPI’s are metrics, and metrics are KPI’s but KPI’s and metrics are not the same thing. I know, I said I was going to help you understand and I probably just confused you more.
Metrics are a multitude of numbers that, as an owner, you should be looking at frequently. Like your financial reports are metrics, for example. KPI’s are a set of specific numbers that you need to focus on based on the direction you want to take your company. They are the driving force of your company.
For example, a startup company will have different KPI’s than an established company. And they may change frequently depending on the economy or if for instance, you want to change the direction of your company. They are all metrics, but you want a small amount of those metrics to focus on what you want for your company.
Below are examples of some KPI’s you could focus on. They will give you an idea on what KPI’s are, so that you can get a clear view of your current financial picture.
These are just examples and all of the names and numbers have been changed, none of the names or numbers are real.
We are an accounting firm, so knowing how many books are completed on time is a Key Performance Indicator. How quickly is a new client being added to our system and ready to go?
For our marketing department, how many consults did we have last week?
You’ll see every department will have its own set of KPI’s. You need to decide what drives YOUR business and determine which activities you should focus on.
Not every business owner will be interested in this, but one KPI that I look at each month is the Human Value Capital Add. This metric is important to me because it literally helps me to see the value each of my team members bring to the company, based on how much they cost and what are they bringing to the company.
You might want to check ongoing recurring revenue. Is your cash balance going up or down? If it’s going down, how quickly is it going down? This gives a good idea if you might be in trouble.
How many new clients did you bring on last month? How many clients did you lose? Your company won’t grow if you brought on 5 new clients, but you lost 7.
This is an example of my monthly expenses. I also like to factor in my larger, annual expenses and divide them up throughout the year. It’s a lot easier to set aside smaller amounts of cash each month, than to come up with a large sum once a year.
You can see in this example, the minimum amount needed to cover monthly expenses is $211,047. This gives me a good picture of where I’m at financially.
How much is your team costing you? This example could look a little different for you depending on whether you have 1099 or W2 employees, or a combination of both. For me, I have a column for their wage amount, and then the actual cost amount including unemployment and payroll taxes.
The cost of your team and how much revenue you’re getting back from that cost should be a win-win for your business and your team in order for your business to thrive.
You’ll want to see what the driving factors are for your company. This could be sales consults, delivery of product or turnaround time. Keeping track of these Key Performance Indicators should give you a good understanding of the real time financial picture of your business.
For more tools and resources to help you track your financial goals, head over to our free Wealth Resource Page which happens to include a pdf about KPIs.
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