The financial KPIs every business should monitor
You don’t need to be a finance expert to run a successful business, but understanding your key financial metrics can make a world of difference. Financial KPIs (Key Performance Indicators) help you measure how well your business is really doing, beyond just “money in, money out.”
By regularly tracking a small set of meaningful KPIs, you can make smarter decisions, catch problems early, and drive more consistent growth.
Gross profit margin
Gross profit margin measures the percentage of revenue remaining after subtracting the direct costs of producing your product or service. It reflects how efficiently you’re managing production or service delivery and is key to maintaining overall profitability.
Actions:
· Calculate it regularly (Revenue – Cost of Goods Sold) ÷ Revenue.
· Review supplier and production costs for savings opportunities.
· Identify underperforming products or services with low margins.
· Set pricing with margin in mind, not just market rate or competitors.
· Monitor for changes month to month to spot emerging issues.
Review your gross margin by product or service line. If one area has significantly lower margins, investigate why and consider adjusting pricing or cost inputs.
Net profit margin
Net profit margin represents the percentage of revenue that remains after all expenses such as administrative costs, wages, rent, and taxes have been deducted. It’s a key indicator of your business’s overall profitability and financial health.
Actions:
· Track your net profit margin (net profit ÷ revenue) monthly or quarterly.
· Compare against industry benchmarks to see how you're performing.
· Look for unnecessary overheads or subscriptions eating into profit.
· Plan for a sustainable margin, not just growth in top-line revenue.
· Use it to evaluate the profitability of new initiatives.
Use your latest income statement to calculate your net profit margin and compare it to past quarters. If it’s shrinking, look into your expenses and identify what’s driving the decline.
Cash flow
While profit reflects your business’s earnings on paper, cash flow measures the actual movement of money into and out of your bank account. It’s a critical KPI for day-to-day operations, as strong cash flow ensures you can pay expenses, invest in growth, and navigate unexpected challenges.
Actions:
· Monitor cash in vs. cash out each week or month.
· Track your operating cash flow separately (cash from core business activities).
· Forecast cash flow at least 3 months ahead to plan with confidence.
· Speed up receivables and slow down payables (where appropriate).
· Avoid surprises by setting aside funds for tax and seasonal dips.
Set up a basic 90-day cash flow forecast to track expected income and expenses over the next three months. Even a simple spreadsheet can reveal potential shortfalls in advance, giving you time to make adjustments before cash flow becomes a problem.
Accounts receivable days
Also called debtor days, this metric indicates the average number of days it takes for customers to pay their invoices. A high figure can signal delayed payments, which may strain your cash flow and hinder your ability to meet financial obligations on time.
Actions:
· Calculate (Accounts Receivable ÷ Revenue) × 365 to get your accounts receivable days.
· Set clear payment terms and enforce them consistently.
· Follow up quickly on overdue invoices.
· Offer incentives for early payment (e.g., small discounts).
· Consider using automated reminders or debtor management software.
Review your current accounts receivable and identify the slowest payers. Create a follow-up plan or consider adjusting their terms.
Current ratio
The current ratio measures your business’s ability to meet short-term obligations by comparing current assets to current liabilities. A healthy ratio indicates strong liquidity and suggests that your business can comfortably cover its day-to-day financial responsibilities.
Actions:
· To calculate your current ratio you divide current assets by current liabilities.
· Aim for a ratio between 1.2 and 2.0 (though this varies by industry).
· Ensure you have enough liquid assets to cover short-term debts.
· Keep a buffer of accessible cash for unexpected expenses.
· Use this KPI when applying for financing or dealing with lenders.
Ask your accountant to include your current ratio in your monthly reports and flag when it falls below your target threshold.
Want to get a handle on your numbers?
We’ve made it easier for you to track your key financial metrics with a free downloadable KPI template. It’s simple, practical, and designed with small business owners in mind—no accounting degree required.
Final thoughts
The right KPIs turn your numbers into insights, and insights into action. If you’re not already tracking these metrics regularly, start small. Even one or two can help you make better-informed decisions and grow your business with confidence. If you’re not sure how to calculate or interpret these KPIs, a bookkeeper, accountant, or virtual CFO can help set up the right dashboards so you can stay focused on running and growing your business.
Looking to work with an accounting firm in Wellington? We’re here to help, get in touch with us today.
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