Part 2: More key performance indicators for your business

More ways to track and drive growth

Read part 2 of our series to discover the KPIs critical to business success and the role of a trusted accountant.

KPIs as a benchmark for success

Understanding key performance indicators (KPIs) not only offers an instant view of business health, but boosts your financial literacy.

#4 Profit margin

What is it?
Your profit margin is how much of every dollar your business keeps from its earnings.

What does it indicate?
Monitoring profit margins can uncover pricing issues and identify costs that threaten your profitability.

How is it measured?
Subtract your costs from your revenue, divide by your revenue and multiply by 100 to calculate your gross profit margin percentage.

Who measures it?
Run the numbers yourself in your accounting software or get expert support from your accountant.

What do you compare to track performance?
Choose your profit margin calculation (gross, net or operating) and check in each month.

What’s the industry benchmark/target KPI range?
This varies widely across industries. For instance, hospitality runs on thinner margins than a business consultancy.

Why and how it can impact your business?
A thin profit margin makes your business vulnerable in uncertain economic times. Widening your profit margins ensures you make more from every dollar of revenue.

What to ask your accountant?
Should I be calculating gross, net or operating profit margins?
What percentage should I be aiming for in my industry?

#5 Client retention rate

What is it?
The number of clients your business retains over a given period of time.

What does it indicate?
A high retention rate indicates a good level of client loyalty which is a great indicator that you are on the right business track.

How is it measured?

• Select a time period
• Subtract new clients gained from the total clients at the end of the period
• Divide by the number of clients you had at the start of the time period
• Multiply by 100 to calculate the rate as a percentage

Who measures it?
You can run the numbers or get your accountant to do it for you.

What do you compare to track performance?
Monitor client retention over the same time period (month, quarter or year) to get a more accurate result.

What’s the industry benchmark/target KPI range?
A realistic KPI for most businesses is 80-90%.

Why and how it can impact your business?
Keeping existing customers is cheaper than trying to win new ones. Loyal customers are worth up to 10x the value of their first purchase, generating referrals, promoting your brand to others and offering valuable feedback.

What to ask your accountant?
What client retention rate should I aim for in my sector?
How often should I be measuring client retention for maximum impact?

#6 Accounts Receivable/Accounts Payable ratio

What is it?
This compares how much money is owed to you (accounts receivable or AR) with how much money you owe to others (accounts payable or AP).

What does it indicate?
Your business cashflow is impacted by outstanding invoices. If you owe more money than you are due to receive, your business could be in trouble.

How is it measured?
Divide AR (money owed to you) by AP (money you owe others).

Who measures it?
You can run the numbers or get support from a trusted accountant.

What do you compare to track performance?
Measuring your AR/AP ratio on a monthly basis helps identify seasonal trends.

What’s the industry benchmark/target KPI range?
A ratio of 1:1 indicates you can just get by. A ratio of 2:1 or 3:1 signals you are in a healthier financial position.

Why and how it can impact your business?
 It’s difficult to operate a business without the cash to meet all your obligations. Increasing your AR/AP ratio gives your business room to grow, allowing you to save and invest without worrying about cashflow.

What to ask your accountant?
What is my current AR/AP ratio?
Where can I increase revenue/reduce costs to improve the ratio and boost my bottom line?

Measure what matters

Talk to your accountant about which business KPIs suit your business to track.

Plan a sustainable business future with expert advice on KPIs.