5 Financial KPIs every business owner should know

Running a business means keeping an eye on a number of factors including sales, costs, customers, staff, tax, and cash flow, to name a few.

But when it comes to understanding how your business is actually performing, you don’t necessarily need to monitor dozens of different figures.

Tracking the right financial key performance indicators (KPIs) for your business goals can give you a much clearer picture of its financial health, help you spot potential problems earlier and support better decision-making.

Every business will have a different view of what is important track, but as a starting point, here are 5 of the most common financial KPIs that every business owner should understand.

1. Gross profit margin

Your gross profit is what remains from your revenue after deducting the direct costs associated with delivering your product or service, and is typically expressed as a percentage.

For example, if your business generates £100,000 in revenue and the direct cost of delivering that work is £60,000, your gross profit is £40,000 and your gross profit margin is 40%.

Tracking your gross profit margin can help you understand whether your pricing and direct costs are working for you.

If revenue is increasing but your margin is shrinking, for example, it could indicate that your costs are rising, your pricing needs reviewing or the type of work you’re taking on is changing.

Looking at the trend over time can often tell you much more about business performance than looking at turnover alone.

2. Customer acquisition cost (CAC) and lifetime value (LTV)

How much does it cost you to win a new customer and how much is that customer worth to your business?

Your customer acquisition cost (CAC) is the average amount you spend acquiring a new customer which could include marketing spend, advertising, sales, events and other activities involved in generating new business.

Customer lifetime value (LTV) estimates the amount of revenue a customer will generate for you over the course of the business relationship.

These two numbers become particularly useful when looked at together, because if you’re spending £500 to acquire a customer who generates £600 of value, that’s a very different proposition from spending £500 to acquire one who goes on to generate £10,000.

Understanding the relationship between CAC and LTV can help you assess which marketing and business development activities are genuinely worthwhile, how much you can reasonably invest in winning new business and the value of retaining the customers you already have.

3. Cash flow

What is the difference between cash flow and profit? Profit tells you whether you’re making money. But cash flow tracks the money moving into and out of your business. Looking ahead through a cash flow forecast can help you identify when you might have more money going out than coming in.

Anticipating factors such as large bills, tax payments, and significant investments in advance gives you more time to plan and make decisions.

If you’re considering recruiting, purchasing equipment or investing in growth, understanding your future cash position can help you assess not only whether the business can afford it today, but what that decision could mean several months down the line.

4. Return on Investment (ROI)

When you spend money in your business, what do you get back? The ROI helps you assess whether an investment is generating enough value to justify its cost.

That investment could be a new piece of equipment, a marketing campaign, new software, additional staff or even moving into larger premises.

But looking at ROI encourages you to think beyond the price tag, because a cheaper option isn’t necessarily better value, and an expensive investment isn’t necessarily a bad decision if it can deliver a strong enough return.

ROI can also help you compare where your money could have the greatest impact. If you’re deciding between investing in additional marketing, new technology or extra capacity, understanding the potential return can help make that decision more informed.

Not every return is immediate or easily measured, but asking “what are we getting back from this?” is a useful habit for any business owner.

5. Break-even point

Your break-even point is how much your business needs to generate to cover its own costs.

Understanding your break-even point gives you a useful baseline for setting sales targets, assessing pricing, planning recruitment, making decisions about additional expenditure, and can be particularly useful when considering growth.

For example, if you’re thinking about taking on another member of staff, moving premises or investing in new technology, understanding how that additional cost changes your break-even point can help you assess what the business needs to generate to make that decision financially sustainable.

Which financial KPIs should your business track?

These five financial KPIs are a useful starting point, but they aren’t a universal dashboard that all businesses should abide by.

The financial KPIs that matter most to you will depend on your business, your sector and what you’re trying to achieve.

For example, a construction business might need to pay particularly close attention to project margins and work in progress, and a professional services firm might monitor utilisation, recovery rates or revenue per employee.

The important thing is identifying the numbers that genuinely tell you something about your business, and then using them to make decisions.

Turning your business numbers into useful information

Knowing your numbers should help you answer useful questions, such as: Are we making enough margin on the work we’re doing? Can we afford to recruit? Why is cash tighter this month? Which areas of the business are performing best? What happens if our costs increase? What do we need to achieve to hit our goals?

At GLX, our team will work with you to help you interpret your figures in a way that will help you turn it into information you can actually use. Get in touch with the GLX team to find out how we can help.