Guest blog: 7 metrics your small business should track

Revolut Contributor

 · 06/24/2020  · 06/24/2020

Matthew Lowry, Head of Operations (EMEA), Fathom

Despite some fantastic ideas, brilliant products and passionate owners, it’s a sad fact that many small businesses never make it to their third year. So if you’re a small business owner, entrepreneur  or sole trader, it’s crucial you have the right tools and apps to monitor exactly what’s going on in your business so you can react accordingly, before it’s too late.

Key performance indicators (KPIs) track the health of your business, and are crucial in surviving turbulent times, pursuing a path of growth, and receiving outside investment. Fathom has powerful financial monitoring and reporting tools, including letting you track multiple KPIs and distill complex, disparate information into easy-to-understand KPI visuals. Here at Fathom we’ve identified seven KPIs that SMEs should keep on top of, to manage their cost base and ensure future viability:

Gross profit

You’re in business to make a profit right? This is your passion but also your livelihood, so you really want to track how you’re doing that. Gross profit, allows companies to see the profit they are generating after deducting their costs of sales from their revenues.

Cost of sales are expenses directly related to sales output activity, as opposed to ongoing costs such as rent, heating and lighting. For example, a business manufacturing physical goods will include their cost of materials, staff labour costs in putting goods together and expenses related to getting the items into a sellable condition (i.e. packaging and transportation costs).

Gross profit can be calculated on a value basis or as a percentage of revenues. Gross profit percentage should be relatively constant, as whilst sales volumes can vary the associated margin should be similar. The value of gross profit indicates excess funds that can be used to budget for general expenses and business expansion.

This KPI will feature in ascertaining pricing, your position in the market versus competitors, and how realistic your forecast is in terms of profit earned and increase in spend. Fathom has Revenue, COGS, Gross Profit Percentage and Profitability Ratio as some of the 50 default KPIs, making it easy for you to get started with your KPI tracking.

Cost of Acquiring a Customer (CAC)

No matter what your sector, service or product, every business needs customers to generate that profit. But ask yourself this – do you know exactly how much it costs you to acquire a customer? Well you should. CAC is a KPI that should be a focus no matter what stage your company’s at.

An early-stage seed company should be laser-focussed on acquiring customers to prove product-market fit. In later stages, you would focus on profitability and the potential returns to the shareholders. As a result, the amount that you are spending on acquiring customers is paramount. At Fathom, we know that certain industries have unique KPIs. As a result, we let you add your own custom and non-financial KPIs to ensure that you are measuring what matters, including your CAC.

Return On Capital Employed (ROCE)

ROCE is important in ascertaining the efficiency of your management team, in allocating capital to revenue generating activities. For every dollar you have put into the business, what has that returned for the business? The higher the return, the better the capital allocation and the more efficient that the business is being run.

If your business has investors, this will be a key KPI they’ll want you to track like a hawk. Getting that information to them in an easy-to-use way is where Fathom’s stunning reporting tools come into play, letting you generate reports based on the very latest financials.

Receivables days

Receivables days is one of the best indicators of liquidity (a reflection of how easily assets can be converted into cash) in a business. Expressed in days, it signals how long it takes to get paid for goods sold on credit. Whilst average receivables days can differ on a sector-specific basis, this KPI illustrates how effective companies are at collecting cash when invoices become due. Target receivables days should be similar to invoice terms (i.e. 30 days) and an increase suggests that companies are struggling to collect cash promptly.

Receivables days should be measured monthly and are calculated by taking the accounts receivable value from the balance sheet, dividing this by annual revenues and then multiplying it by the number of days in the year.

Free cash flow

That is free as in ‘not tied up elsewhere’ sadly. Free cash flow is the cash left after subtracting capital expenditures from operating cash flow. The term “free cash flow” is used because this cash is free to be paid back to the suppliers of capital. Fathom’s cash flow waterfall chart details your Operating Cash Flow and Free Cash Flow in an easy to interpret way, so you can see exactly how much free cash you have to reinvest in new projects.

Burn rate

As we’ve recently seen, if your entire business grinds to a halt, how long can you survive? Burn rate, or runway, is the amount of cash the company is using each month. This is an essential KPI to keep on top of as it tells you how many weeks/months/years of costs you can cover if revenue was to drop to zero for the period. This becomes incredibly important for times of economic uncertainty and market dips, but is also useful for ‘boom’ cycles (remember those!) in the economy as you will be wanting to ensure you are generating more cash than your burn rate on an incremental basis (see ROCE above).

Market share

For more mature companies, or those who are defining a new industry, keeping on track of your share of the market will become more and more important.

This will help guide strategy as it will let you know the percentage of the Total Addressable Market that you have, who else has the other main segments of market share, and will let you develop your strategy and marketing messaging to align yourselves with competitors to set yourself up for success.

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According to a PDF from the UK’s Office for National statistics, there were 5.9 million private businesses in the UK at the start of 2019, of which more than 99% of which are small or medium-sized businesses. Sadly, a large proportion of these will fail, in part, because they didn’t stay close to the numbers and track their KPIs. Think of all that effort, passion and experience going to waste.

Don’t be one of those businesses, get insights into what’s going on with your financials and KPIs with Fathom. To take advantage of an extended free trial offer, input this code: fathom_revolut here.

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