Published by Annmarie N.
The financial statements of a business tell the story of how the business is performing. Subsequently, it is important to set key producing indicators referred to as KPIs. In the early stages of a business, KPIs are important because whatever gets measured gets managed. If you feel that your business is not hitting the major KPI benchmarks, it may be time to revisit the business plan and reestablish some KPI goals to better track the progress of top leadership, products, and overall business operations.
Since the financial statements tell the story of the condition of your business, read, review, measure, and adjust strategic plans accordingly. Accountants, financial managers, and bookkeepers spend a great deal of time ensuring accurate financial statements because these statements can actually mean the life or death of your business. Through reading, understanding, and correctly interpreting your finances, you can determine if your business is moving ahead at a good pace or falling behind plan. Financial reports also indicate if there is enough cash to pay short-term obligations or whether the business is heading into a financial pinch. Correspondingly, it is important to review financial reports to know the business’s condition, as this knowledge allows you to plan and take action appropriately.
Here are five key KPI measurements that are critical to monitoring and managing small businesses and an estimated range:
- Cost of Goods/Services Sold (COGS): 35-50%
- Sales & Marketing: 5-15%
- Management: 15%
- Overhead: 10-20%
- Profit (Earnings Before Tax): 10%
The cost of goods figure divided by total sales is the percentage spent on Cost of Goods Sold (COGS) KPI. This figure includes services, products, and direct labor and material that is directly associated with the product or service delivery.
Sales & Marketing KPI is measured by the total dollars spent on sales, commission, social media, advertising, and any other sales and marketing expenses divided by total sales. Each company may set their own goal KPI; however, the estimated preferred rate is in the ballpark of 5%-15%. For a company in the early stages of development, the Sales & Marketing KPI metric will likely be on the higher end of the spectrum. A well-established company with healthy KPI metrics will be on the lower end of the Sales & Marketing percentage range.
Management KPI should ideally measure about 15% of total sales. Expenses in this category include costs of C-Suite and any other strategic consultants that help drive the business forward.
Overhead KPI is another important measurement that should be calculate around 10% of total sales. An overhead KPI measurement higher than 10% should prompt review of expense details. The percentage spent on overhead is calculated by the sum of rent, supplies, building, administrative workers, and operational workers costs, divided by total sales.
Earnings Before Taxes (EBT) is another important KPI that should be measured each month and factored into the financial statements. The earnings before taxes figure is the amount left over after all expenses including payment to owners or shareholders. Take this number and divide it by net sales to get the Earnings Before Taxes KPI percentage. This metric determines whether the business is growing at a healthy rate.
The measurements discussed above are some of the more important KPIs that are crucial to both new and established businesses. If your business’s KPI percentages are not as planned, look at the details to locate cost drivers that caused the operations metrics to not meet the original plan. Younger businesses are often off-track from ideal KPI metrics because they are still pinpointing what does and does not work. That is okay; however, keep in mind that what gets measured always gets managed. In the meanwhile, if you would like our help, feel free to reach out to speak with one of our management accountant advisors at info@urbanaccountingllc.com.
