KPI building blocks
Accounting and Financial Reporting

As a business owner, you need to be able to quickly and accurately measure the financial health of your business. One way to do this is by tracking key performance indicators (KPIs). KPIs are analytical measures used to measure businesses’ performance. They are numerical metrics that represent a company’s progress towards achieving its business objectives. KPIs can be as specific as sales figures or customer feedback ratings, or as broad as customer satisfaction scores. They help businesses identify areas to focus on and establish goals around which they can focus their efforts. Ultimately, KPIs provide essential guidance in making informed decisions that will influence a business’ profitability, sustainability, and overall success. In this blog post, we’ll discuss some of the most important accounting KPIs and financial reporting. 

Line of Business (LOB) Revenue vs. Target

Revenue arrow trending upwards graphic

Understanding a business’ line of business (LOB) revenue vs target KPI is an essential part of success. By keeping track of projected versus actual revenue, a business can have an informed understanding of their budgeting and financial decisions. For example, if the LOB revenue is falling short of target amounts, it could be an indicator that too much money has been allocated in one area or that costs need to be cut in another. Regular monitoring of LOB revenue and its related KPI allows businesses to make necessary adjustments timely, thus staying closer to budgeted targets and allocating resources more efficiently, ultimately leading to greater profitability.

Revenue Growth Rate 

Growth letter blocks on a stack of coins

The revenue growth rate measures how quickly a company’s revenue is increasing or decreasing over time. This KPI can provide valuable insight into whether or not your business is on track for long-term success. It should be monitored closely and compared against other companies in the same industry to ensure that you’re staying competitive. 

Budget Variance

Calculator and dollars bills beside a notepad.

Budget Variance is a Key Performance Indicator (KPI) that compares the actual budget allocation to what was actually spent. This KPI can help managers identify and investigate any differences between strategic planning and operational results. It gives insight into how efficiently resources are being used, provides an overall financial picture of an organization, and helps uncover root causes for budget overruns. In addition, it allows organizations an opportunity to measure current performance against past goals and act accordingly in order to stay on track with their bottom line. By analyzing the Budget Variance KPI closely, businesses can maximize their resources and make informed decisions about future activities.

Profit Margin 

Hundred Dollar bill and the word 'Profit' on it.

A profit margin measures the amount of money a company makes after deducting expenses from their total revenue. A higher profit margin indicates better financial performance and higher profits. It’s important to keep an eye on this KPI so that you can make sure your business is making enough money to cover its costs and remain profitable. 

Cash Flow 

Hundred dollar bills stacked

Cash flow measures the amount of cash coming in and out of a business over a certain period of time. This KPI is important because it shows how well a company can manage its cash resources and finance operations. Tracking your cash flow will help you make better decisions about when to invest in new projects or products, when to pay bills, and when to hire new employees. 

Working Capital

Coins stacks growing from left to right

Working capital is a key performance indicator (KPI) that measures the company’s liquidity. It is calculated by subtracting current liabilities from current assets, and indicates the amount of cash available for day to day operations. Having an adequate level of working capital can ensure that a business can meet its obligations and continue functioning without disruption. For larger businesses, it may prevent them from requiring external financing such as overdrafts or loans to remain solvent. This measure should be included in the annual report so directors can have a clear picture of their debt levels and actively manage both free cash flow and cashflows, enabling growth while still remaining cost efficient. Ultimately, having efficiently managed working capital enables businesses to stay competitive within their industry and maintain customer satisfaction, which is crucial for any successful enterprise.

Accounts Payable Turnover

Calculator beside a spreadsheet.

Accounts Payable Turnover is an important Key Performance Indicator (KPI) to monitor the efficiency of a business. It helps measure the speed at which businesses pay vendors, suppliers and other debts due the company. This KPI shows how quickly the payments are made and how much of the suppliers and vendors’ credit is used by the businesses, as well as examining the company’s payment terms. By understanding this ratio, businesses can manage their working capital more efficiently, assess potential risks of not paying creditors in time and even negotiate better terms with existing creditors. Having a good Accounts Payable Turnover ratio helps with forecasting cash flow needs and meriting access to higher lines of credit from banks or other lenders. The amount of attention dedicated to maximizing this ratio will directly influence a business’s overall financial health, making it essential for accounting departments to monitor closely.

Accounts Receivable Turnover

Magnifying glass over a spreadsheet

Accounts receivable turnover (AR turnover) is an important metric that measures the effectiveness of a business’s credit policy and how promptly customers are paying their invoices. This key performance indicator (KPI) provides an indication of how efficiently the company can collect receivables, as well as assess the effectiveness of its accounts receivable procedures. A low AR turnover ratio or low length of collection period indicates that customers generally take a long time to pay their invoices; a high AR turnover ratio or short collection period, on the other hand, suggests that customers are making timely payments. Ultimately, the goal of any business is to increase its AR turnover while decreasing days in accounts receivables, as this will not only lead to more predictable cash flows but will also reduce bad debt losses. Companies should therefore monitor these metrics closely and take proactive steps to improve them as necessary.

By using KPIs like revenue growth rate, profit margin, and cash flow in your company’s financial reporting you can get an accurate picture of your business’s financial information at any given time. Keeping an eye on these metrics will help you make informed decisions about investing in new projects or products, paying bills, hiring new employees, working with business partners, etc., which will ultimately lead to greater success for your business in the long run. 

Still Don’t Know Where to Start With Financial Planning and Budgeting?

Do you need help with planning your financial planning and budgeting? Financial planning and budgeting are essential for the success of any business. It is important to create a budget that will help you track your income and expenses, set goals, and make informed decisions about your future. Here’s some tips & best practices to go with the KPI’s that we’ve given you:

Start with a Goal-Setting Exercise 

Notepad with 'Goals' written on it.

The first step in creating a financial plan is goal setting. You should sit down and write out your short-term (1–2 years) and long-term (3–5 years) goals for your business. This exercise will help you determine where you want to go financially in the future and how much money you need to achieve those goals. Examples of short-term financial targets could include improving credit scores, reducing costs and debt, increasing cash flow, expanding customer base and profitability, or donating more to charitable causes. Examples of long-term financial goals for a business could include expanding into new markets, investing in research and development, opening additional locations, or launching new products or services. Long-term goals are often harder to measure than short-term ones but they will be important in the overall success of your business. 

Create a Budget & Monitor Spending Habits 

Credit card with bubbles showing different expenses.

Creating a budget is essential when it comes to managing your finances properly. This allows you to keep track of where your money is going and how much you have left over after each month, and the company’s net income. To make sure that your budget is accurate, monitor spending habits and make adjustments as needed. This way, you can ensure that all expenses are accounted for and there are no surprises when it comes time to pay bills or taxes. 

Automate Your Processes 

Automation, business, and streamlining graphic.

Budgeting can be time consuming for your company’s operations when done manually but there are tools available that can automate many of the processes involved. For example, business automation software like SWELL automates financial planning by automatically tracking income and expenses, optimizing the invoice payment cycle, and providing real-time insights into cash flow projections. Automating these processes saves time so that you can focus on running your business instead of worrying about finances. 

Develop an Investment Plan 

Invest blocks graphic

Another important aspect of managing money as a small business owner is creating an investment plan. Even if your company isn’t big enough for traditional investments, there are still ways for you to increase your future growth for your capital, such as making use of the company’s assets and analyzing financial statements like the balance sheet in order to increase profits or prepare for future investments down the line. Consider investing in stocks or bonds, or look into peer-to-peer lending platforms that provide access to potential borrowers looking for short-term loans at competitive rates. You could also look into real estate investments such as rental properties or commercial buildings depending on what makes sense for your situation.  Something to be mindful of while you’re planning to invest is the GAAP.

Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (GAAP) is the accounting standard adopted by the U.S. Securities and Exchange Commission and are a set of standards and methods for accounting that businesses use to prepare their financial statements. GAAP can be applied to both the investor seeking finance and people trying to obtain potential investors. It is critical for anyone looking to receive or offer investment to understand and adopt GAAP principles, as it ensures accurate records of investments, liabilities, equity, profits and losses in accordance with accepted industry standards. Investors have an advantage in this respect as they can insist that any potential partnership must conduct operations within acceptable accounting framework for transparency. Conversely, those who are looking for investments must be able to demonstrate a commitment to high levels of financial accountability if they want their fundraising efforts to be successful.

Have A Backup Plan In Case an Economic Downturn Or Unforeseen Circumstances Happen

Empty wallet, downwards trending economy graphic

No matter how good your company’s performance is, it’s important to be prepared for any potential changes that could have a negative effect on your company’s financial position. Some unforeseen circumstances that can impact a business include an economic downturn, natural disasters, changes in the political climate, new laws or regulations from the Internal Revenue Service (IRS), increased competition, technological advances, and shifts in customer preferences. Having a financial backup plan in place can help you prepare for any of these situations. Here are some vital steps to take when creating your backup plan:

Cash Flow Management 

The first step to preparing for an economic downturn is to take control of your cash flow. This means understanding the actual and budgeted costs associated with each month and finding ways to reduce them while still maintaining quality products or services. You may need to negotiate with vendors or suppliers to get better terms on payments or consider cutting back on non-essential expenses like travel and entertainment until the economy improves. Taking control of your cash flow now can help you weather any economic storm that may come down the road. 

Emergency Funds 

Having an emergency fund set aside is another important part of having a financial backup plan in place. Your emergency fund should be accessible and liquid so you can use it as needed during times of crisis. It should also cover at least 3-6 months’ worth of living expenses and operational cost for your business, so you’re prepared if the economy takes a turn for the worse. Additionally, by finding ways to increase free cash flow such as getting better terms from suppliers or optimizing pricing strategies on products, you will have more money available to put towards an emergency fund. Be sure to work with a financial advisor when setting up your emergency fund so you know exactly how much money needs to be set aside and how best to invest it safely. 

Government Programs 

In addition to managing your own finances, it’s important to research what government programs are available in case of an economic downturn. Many governments provide loans, grants, tax breaks, and other forms of assistance specifically designed for small businesses during tough times. Knowing which programs exist can make all the difference when it comes time to apply for them in case hard times hit your business financially due to an economic slowdown or recessionary period. 

Research and Monitor the Market Conditions 

The best way to prepare for an economic downturn is to stay informed about what’s happening in the market. Researching current trends and monitoring changes in the market can help you anticipate potential problems before they occur, as well as assess the company’s financial performance. This research can also provide you with valuable insights on how to adjust your business strategy accordingly. Additionally, staying aware of any potential issues can help you spot opportunities and make sure that your business is prepared if something does happen. 

Financial planning and budgeting are essential components of any successful business plan. With proper goal setting exercises, creating a detailed budget, and using automation tools like SWELL’s Business Automation Software, business owners can gain control over their finances while freeing up valuable time that can be used to run their businesses more efficiently. Take the first step today toward creating an effective financial plan for your business! If you’re interested in SWELL’s Accounting Automation, or any of our other Business Automation services, feel free to contact us with any questions or start your free trial today!

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