As we commence with a new year, it's a good time to assess your business goals and set clear financial Key Performance Indicators, or KPIs, to help you achieve a successful 2025. KPIs will help you with decision-making and tracking your company's progress throughout the year. They can help you achieve growth and profitability. Which ones should you focus on?
Sales Growth
For starters, sales or revenue growth should be a primary focal point when it comes to KPIs.
"Sales growth is one of the most powerful metrics for any organization because it’s directly tied to revenue and profitability," says Alison McKenna at Phocas.* "This is a core tool used to measure the overall health of your organization. Check in on your sales growth anytime you want to get a better reading of how your sales are going. And, you shouldn’t only focus on declining sales. If you see an increase, it’s worth digging deeper to understand what is driving this growth. Is it due to price increases, inflation, branch openings or the addition of new product lines? Or is it due to customer acquisition i.e. attracting new customers, or by increasing share of wallet with your existing customers. Observing such trends over a period of time can help to shape future sales & marketing strategies."
GPM as a Percentage of Sales
Gross profit margin (GPM) is also an essential KPI. It measures the percentage of revenue remaining after accounting for the cost of goods sold (COGS).
"It’s critical to have a metric that ensures you aren’t paying suppliers more than you’re netting in sales," says Now CFO.** "Gross profit margin as a percentage of sales shows what your business’ total profits are compared to your revenue. Tracking your GPM as a percentage of sales overtime will allow you to more easily quantify the amount of earnings you’re keeping. Your gross profit margin increases as you retain more money, but a decrease in this KPI can point to spending too much on supplies. This indicates a need to reevaluate fixed costs or pricing models. An outsourced accountant can help you not only implement this KPI, but analyze it in order to make business decisions."
Operating Cash Flow
Operating cash flow is the cash your business operations generate and is an important indication of your business's ability to pay its bills, make investments for growth and maintain resilience. This KPI offers a real-time glimpse into your company's financial health, differing from profit in that it's not directly impacted by accounting practices in the same way.
You can improve your business's operating cash flow by optimizing accounts receivable, properly managing your inventory, and keeping good control over expenses. Keeping healthy cash flow is critical for keeping your business in good financial standing.
Accounts Receivable Turnover
Speaking of optimizing accounts receivable, turnover here is another good KPI to track, as it will help you maintain that healthy cash flow. Measure the efficiency of your ability to collect payments from customers. If the turnover rate is high, your customers are largely paying on time, helping to keep cash flow. If it is low, you have a problem in this department that needs to be addressed.
Make sure customers are aware of payment terms, offer flexible options, and stay on top of invoices. Consider offering discounts for quick payments.
Customer Acquisition Cost
Customer Acquisition Cost (CAC) is the total cost of acquiring a new customer, which includes marketing and sales expenses. This can include anything from employee salaries to advertising spending. Knowing CAC can help you plan for scaling your business. The KPI will help you determine how efficiently you're able to get new customers.
Divide your total acquisition costs by the number of new customers gained during a specific period to track this KPI. It will help you determine the ROI of your overall marketing efforts, and then you can look for ways to reduce the costs from there.
Net Profit Margin
This KPI measures the percentage of revenue that remains as profit after all expenses, taxes, and other costs are deducted. It shows overall profitability with a higher net profit margin illustrating that your business is able to count more revenue as profit.
Divide your net profit by your total revenue and multiply that by 100 to determine your net profit margin. For example, if your net profit is $30,000 and your revenue is $100,000, your net profit margin is 30%.
Knowing your net profit margin will help you evaluate your cost management and profitability trends.
Use the new year as a chance to set financial KPIs that you can track throughout 2025 and use as information that can help you better manage your company's finances.
* https://www.phocassoftware.com/resources/blog/the-15-most-important-financial-kpis
** https://nowcfo.com/financial-kpis-to-keep-your-business-on-track-in-2023
