Key financial KPIs every business owner should track

Track a small set of financial KPIs that answers four questions: is there enough cash, does each sale make money, is the business growing, and can it carry its debt. For most owners that means cash runway, gross margin, operating profit, revenue growth, and days to collect, reviewed weekly or monthly on one page.

You know last month's revenue to within a few thousand dollars. Ask about your cash runway or what it costs to win a customer, and the answer takes a spreadsheet and an afternoon. When a lender, a partner, or a buyer looks at your business, these are the numbers that show whether it is healthy, so it helps to know them before they ask.

Which financial KPIs should you track?

A KPI, or key performance indicator, is a number you have chosen because it tracks progress on a goal and someone owns it. These six fit most businesses:

If you sell subscriptions or repeat services, add customer acquisition cost and customer lifetime value, covered below.

What does each KPI tell you?

Cash runway

If you spend more cash than you bring in, runway tells you how long you have. With $300,000 in the bank and $50,000 of net cash burn a month, you have six months (300,000 ÷ 50,000). That is your deadline to reach break-even, change spending, or arrange financing. If the business generates cash, track your minimum cash balance instead.

Gross margin

Gross margin is what remains of each sale after the direct cost of delivering it. With $2,000,000 of revenue and $1,300,000 of direct costs, gross margin is 35% ((2,000,000 − 1,300,000) ÷ 2,000,000). Track it by product or customer group, because a blended number can hide a line that loses money.

Operating profit margin and EBITDA

Operating profit is gross profit minus the costs of running the business, such as salaries, rent, and marketing. On $2,000,000 of revenue, $180,000 of operating profit is a 9% margin. EBITDA adds back interest, taxes, depreciation, and amortization to show the earnings of the core business before financing and accounting choices. It is the figure many buyers and lenders start from, and how to calculate an EBITDA multiple shows how it is used in a sale.

Revenue growth

Compare each period with the same period a year earlier, so seasons do not distort the picture. Moving from $1,800,000 to $2,000,000 is growth of 11.1%. Read growth beside gross margin: growth that arrives with a falling margin can mean you are discounting to win sales.

Days sales outstanding

It measures how long customers take to pay. With $450,000 of receivables on $3 million of annual sales, you wait about 55 days (450,000 ÷ 3,000,000 × 365). Every day you take off that number is cash in the bank, which how to improve cash flow for your business explains.

Customer concentration

If your largest customer is $480,000 of $2,000,000 in revenue, that is 24%. The share matters less than the question behind it: what happens to your cash if that customer pays 30 days late, or leaves?

Customer acquisition cost and lifetime value

Customer acquisition cost is sales and marketing spend divided by the new customers it won. Lifetime value is the gross profit a customer brings over the whole relationship. If it costs $500 to win a customer who brings $600 of lifetime gross profit, the ratio is 1.2, and almost nothing is left to cover overhead. The ratio that works for you depends on how long the payback takes, because you fund the business while you wait.

What does a healthy KPI look like?

There is no universal good number, because margins differ widely by industry. Judge each KPI against your own trend first, then against peers in your industry, which your trade association or your lender can often describe. The direction matters most. Gross margin shrinking while revenue grows, or runway shortening while costs rise, is where to look first.

How often should you review KPIs?

Review cash and collections weekly, margins and growth monthly, and concentration and customer economics quarterly. Put them on one page, give each an owner, and hold the review on a fixed day. A short list reviewed on a fixed day is easier to keep up than a long list checked when something goes wrong. The cadence fits inside the monthly review described in how to do financial forecasting.

What to do next

1. Choose five KPIs from the table that fit your business, and write the formula for each.
2. Calculate each one for the last 12 months to see the trend, not just today's value.
3. Put them on one page, assign an owner to each, and schedule the review.
4. Ask your trade association or lender for industry figures to compare against.

To see how Surfside Capital Advisors designs KPI dashboards and the monthly review around them, read about its FP&A (financial planning and analysis) work. The article on what FP&A is explains the term.

Questions owners ask

How many KPIs is too many?

More than you can review in the time you give them. Five or six that each tie to a decision are a workable start. Add another only when you can say which decision it will inform, and drop any number nobody has acted on in a quarter.

What is the difference between a KPI and a metric?

A metric is any number you can measure, such as website visits or the number of invoices sent. A KPI is a metric you have chosen because it tracks progress toward a goal and because a named person is responsible for it. Most businesses track many metrics and review only a few KPIs.