Whether you're starting a business or you've already been growing and scaling your business, your business might get to the point where it becomes so challenging to deal with the complexity of the growth and all the things you need to measure while figuring out how to keep things simple, practical, and powerful.
Reducing complexity is such a challenging thing but you can keep things simple yet powerful by having the right KPIs and data cadences in place.
What are KPIs and Data Cadences?
KPI stands for key performance indicator, which refers to the metrics that you should be hitting. You should have different KPIs that are specific to every part of your business (i.e. marketing, sales, HR, finance, etc).
Data cadence represents how often you should look at your numbers. Companies have different intervals and may do it weekly, monthly, quarterly, or annually. By having data cadences, you’re able to stay on track most of the time and identify problems you need to solve before they become a real issue in the future.
The 5 Essential Financial KPIs
1. Available Cash
How much money do you have in the bank? Whether you're looking at it weekly or monthly, pay attention to your cash balance. Is it building or is it declining? Now, people have different ways of defining cash and so think about how you would define cash in your situation.
2. Sales Collected
Focusing on top-line revenue or the total revenue is very important because that's going to be an indicator of cash flow in the beginning. It’s also best practice to look at this weekly so you know what you need to earn each day or week to stay on track with the needs of the business.
3. Cost of Goods
At least once a month, you should be reviewing your costs – what it’s actually costing you to create sales. This could include inventory costs, refunds, and credit card processing fees. You need to understand the Cost of Goods as a percentage of your sales.
4. Gross Profit (or Real Revenue)
Gross profit = Sales Collected minus Cost of Goods
5. Net Income
Net income = real revenue minus your other expenses
If you're a company that's having to nourish debt, it's going to be representative of the cash you have available. If your net income is constantly going negative, the chances of your cash at the very top of that is also going down every week.
Apply these five financial KPIs the earliest you can and the less intimidated you will feel for not understanding your numbers. Begin with having two KPIs weekly and three KPIs monthly, and you're off to a great start!
If you want to learn more about KPIs and data cadences, check out Episode 082: Financial KPIs & Data Cadences For Your Online Business.