5 critical KPIs and why they matter

July 12, 2022 10:52 AM

New businesses and seasoned organizations alike spend a lot of time and energy trying to measure their progress and success over time. As they build and continue to grow, companies need to understand their data and how it affects their profits.

Enter KPIs, or key performance indicators. KPIs use data to measure a business’ progress in a variety of areas. KPIs are valuable tools to help highlight progress toward short-term and long-term goals for a company. Accountants can help clients identify KPIs that are essential to their business and use the results for strategic planning.

Focusing on the right KPIs enables a business to home in on the metrics that benefit it the most. Here are some operational KPIs that are important for businesses to watch.

Operating cash flow

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A business needs cash to survive and grow. Cash on hand enables a business to stay up and running day to day, month to month, and year to year as it builds upon its base. Operating cash flow is a key metric that helps business owners understand how much money is available to run the business.

Operating cash flow is calculated by the total amount of revenue the business generates, minus all of its expenses. Using this KPI, a company can get a good look at its profitability and make sound judgments concerning growth plans and investments in the business.

Revenue growth

Revenue growth is an important measurement to gauge a company’s success. As CPAs calculate a client’s revenue growth year over year, the results can be analyzed to determine whether they are in line with projections. Likewise, a company’s growth can be compared to other businesses within the industry. It is critical to understand whether a business is keeping up with its competitors and what changes may need to be made to increase growth.

Profit margin

As great as it can be to see sales go up, this isn’t the best indicator of the health of a business. More important are the profits a company is bringing in, balanced against the costs of running the business.

A profit margin KPI can be narrowed down to individual products to help identify those that may be less profitable. Some products may be too expensive to produce and need to be cut from the company’s offerings. Others may just need a price adjustment to improve profitability. A business may find their processes are inefficient and the profit margin is suffering. An accurate profit margin KPI is a critical metric for businesses to watch as they grow.

Revenue per unit

Customers are key to generating revenue for a business, and it is vital for companies to ensure they maximize the value of each customer. Revenue per unit measures how much revenue a business obtains per customer. This metric is often used by companies that have regular subscribers or long-term customers, including telecommunications and media companies. A company like Disney or Amazon will likely find immense value in using this metric to determine whether their monthly streaming or online shopping subscribers are generating enough revenue to drive growth and profits.

Customer satisfaction

Companies spend a lot of money attracting new customers, and it is worthwhile to keep them around. After all, bringing in new customers can cost as much as 25 times more than retaining existing ones.

Any good business wants to hold on to their customers and keep them happy, but that can be easier said than done. Making even one mistake can cost a company, with an estimated 80% of customers choosing to switch to another business after a bad experience. Tracking customer satisfaction enables a business to know what their clients want and whether the business is living up to expectations for their customers. Getting customer feedback, making adjustments, and improving the customer experience pays dividends and attracts loyal clients.

Businesses in different industries can find value in many different KPIs. CPAs can target the most important KPIs for their clients and show them up-to-date metrics using visual dashboards. With an experienced CPA in their corner, companies can use data to their advantage as they grow and compete in the marketplace.