5 Key Financial Performance Indicators You Should Be Tracking

When running a small business, you can’t rely on your gut instinct all the time, especially when it comes to evaluating your company’s financial health. You should be objective rather than subjective when determining the financial health of your company.

One way to objectively track the health of your business is through the use of key performance indicators, otherwise known as KPIs. Different types of KPIs represent an array of markers that companies use to measure performance in a variety of areas — from marketing campaigns to supply chain management to finance.

Keeping close tabs on your small business’s financial performance is essential to long-term success. Below, you’ll find eight actionable KPIs that will help you measure your business’s financial health.

1. Working Capital

Cash that is immediately available is "working capital". Calculate your Working Capital by subtracting your business's existing liabilities from its existing assets. Cash on hand, accounts receivable, short-term investments are all included, as well as accounts payable, accrued expenses, and loans are all part of this KPI equation.

This especially meaningful KPI informs you of the condition of your business in terms of its available operating funds, by showing the extent to which your available assets can cover your short-term financial liabilities.

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2. Operating Cash Flow

Monitoring and analyzing your Operating Cash Flow is an essential for understanding your ability to pay for deliveries and routine operating expenses. This KPI is also used in comparison with total capital you have in use—an analysis that reveals whether or not your operations are generating sufficient cash for support of capital investments you are making to advance your business.

The analysis of your ratio of operating cash flow compared to your total capital employed gives you deeper insight into your business's financial health, allowing you to look beyond just profits, when making capital investment decisions.

3. Return on Equity

The Return on Equity (ROE) KPI measures your company's net income in contrast to each unit of shareholder equity (net worth). By comparing your company's net income to its overall wealth, your ROE indicates whether or not your net income is appropriate for your company's size.

Regardless of how much your company is currently worth (its net worth), your current net income will determine its probable worth in the future. Therefore, your business's ROE ratio both informs you of the amount of your organization’s profitability and quantifies its general operational and financial management efficiency. An improving, or high ROE clearly indicates to your shareholders that their investments are being optimized to grow the business.

4. Quick ratio

The quick ratio is another KPI that’s extremely relevant to a business’s financial health. The quick ratio shows a company’s ability to pay short-term financial liabilities immediately. The quick ratio is a better indicator of the ability to do so than the current ratio, as the current ratio accounts for a business’s likelihood of making these payments within a year. The formula for quick ratio is:

Quick ratio = (current assets – inventories) ÷ current liabilities

You may also see people refer to this KPI as the “Acid Test Ratio.” That’s because acid tests are designed to produce quick results, much like this ratio. Essentially, this KPI is a measure of a company’s immediate liquidity and cash on hand.

5. Customer acquisition ratio

Another way to measure financial health is to compare how much revenue you receive per new customer. This KPI is easy to set up.

Customer acquisition ratio = net expected lifetime profit from customer ÷ cost to acquire customer 

To calculate the expected lifetime profit from the customer, you’ll need to consider a customer’s purchasing frequency and average purchasing price. Your costs to acquire the customer can include things like marketing and onboarding costs. The actual variables that make up these components will vary from company to company.

If your firm is healthy, this ratio will be at least one. If it’s less than one, it’s an indication that you’re spending too much to acquire customers and losing money as a result. A high ratio, on the other hand, means that your investment is worthwhile. For instance, imagine the equation yields a customer acquisition ratio of three. This means that you’re earning Rs. 3 for every Rs. 1 you spend to acquire a new customer.

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