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  • Writer's pictureRhys Evans

5 Simple KPIs you should be tracking

Key Performance Indicators, or KPIs, are metrics used to track your financial performance, as well as help with the decision making processes in your business.


These are the snapshots that really tell you how you are preforming, and if you are moving towards your business goals.


Selecting the right KPIs for your business and objectives is crucial, as this makes sure you are tracking the things that really make the difference to weather you are working in the right direction to meet your goals and objectives.


Having said that, there are some basic Indicators that are going to be worth tracking for all businesses.


I am going to run through 5 KPIs that I think nearly every business should be tracking.




Gross Profit Margin

This is a measure of the businesses profitability of its core activities. It is calculated by dividing your Gross Profit but your Net Sales, and is expressed as a percentage.

Gross Profit is also worth tracking in certain cases, as it demonstrates how much your key activities are contributing towards your fixed cost.


Gross Profit = Net Sales – Cost of goods sold

Gross Profit Margin = Gross Profit/Net Sales x100%

 

 

Net Profit Margin 

This is a measure of how much profit your business is making after taking into account all expenses. It is calculated by dividing your net profit for the period by your Revenue.

This metric shows you what percentage of your income is converted into profit, after all expenses are taking into account.

 

Net Profit Margin = Net Profit/Total Revenue x100%

 

Debtor Days

This metric demonstrates how well your business is collecting the cash it is owed from sales on credit. This is a crucial metric to understand and know, as it is going to give you insight of the cash flowing into your business. Debtor days is expressed in days, and is calculated by dividing your Debtors balances by your credit sales, and multiplying by the number of days in the period in question.


Debtor Days = Accounts Receivable/Credit Sales x 365 days

 

Cash Conversion Cycle

Ok, so this one isn't so "Simple" but is a really good metric to get your head around.


This metric demonstrates the average time it takes to convert any investment in stock into cash. It does this by looking at the number of days your business holds stock before selling it, then adjusting for the time taken to pay your supplier, and your customers to pay you for your sales. This metric is useful for understanding when you are likely to see a return on any investment into working capital, and ultimately able to understand when you are likely to be able to re-invest or utilise the cash generated from sales.

 

Cash Conversion Cycle (CCC) = Inventory Days – Creditor Days + Debtor Days

 

 

Quick Ratio/Acid Test

The Quick Ratio, also known as the Acid Test, is a key liquidity risk metric, as it demonstrates your businesses ability to meet its short-term obligations with “Quick assets”. Quick Assets are current assets that can be converted to cash “easily”, namely current assets less stock.

This is a good metric for demonstrating the financial health of a business, and its ability to generate cash quickly.


Quick Ratio = (Current Assets – Inventory)/Current Labilities



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