When operating a new business, keeping a close watch on the company’s financial health can mean the difference between prosperity and a liquidation sale. Monitoring sales numbers and operating costs are obvious numbers to watch, but when used in conjunction with other financial statistics these values can be much more useful. Like a body’s temperature, pulse, and blood pressure, businesses have certain vital signs called key performance indicators (KPIs) which a business owner can track to evaluate the company’s financial health. Although every company’s financial picture differs from others, a few primary KPIs will help all new businesses measure the efficiency and cost effectiveness of company performance.
1. Free Cash Flow
As start ups commonly experience cash flow problems, one of the most important KPIs for a new business to track is free cash flow. Calculating your company’s free cash flow will reveal how much extra cash the company has available to repay debts or to invest. The free cash flow KPI is a value acquired by adding your company’s net cash flow (the sum of operations, investing, and financing cash flow from the cash flow statement) to depreciation and then subtracting all capital expenditures from that number. The resulting KPI is your company’s free cash flow. A healthy free cash flow number is greater than 50% of the net cash from operations (not total net cash). If your company’s free cash flow KPI is less than half the net cash from operations, then the company might be in trouble.
2. Cost Per Invoice
Tracking the cost per invoice KPI can improve business cash flow by measuring the cost per each processed invoice. By revealing the actual cost of each sale, this KPI can help companies reduce expenses. Cost per invoice is calculated by dividing the total cost of operation over a specific period of time (wages, operating expense, manufacturing expense, supplier expenses, etc.) by the total number of invoices processed during that same period of time. Considering each invoice as equal, this KPI does not take into account the varying amounts of revenue brought in on different invoices. Cost per invoice is a clear method, however, of measuring the total expense incurred by the company to process each transaction.
3. Invoices Per Full-Time Employee
Rather than measuring the cost of each individual invoice, this KPI measures the efficiency of a company’s payment to purchase process by tracking the number of invoices processed per full-time employee. This KPI will help a company automate payment to purchase processes and reduce unnecessary expenditures.
4. First Pass Match Rate
In business, time is money. Inefficient invoicing systems require more time for billing and payment processing. Structuring complex invoicing systems to run efficiently can initially put an unnecessary burden on new businesses. The first pass match rate KPI saves new companies money by measuring the efficiency of invoicing systems. To track this KPI, a company needs to keep a count of invoices which require manual attention. That number divided by total invoices equals the first pass match rate. If the rate is high, make adjustments to increase efficiency.
5. Helpdesk Resolution Time
Another measure of your company’s efficiency, the Helpdesk Resolution Time KPI measures the amount of time employees spend to resolve customer inquiries or issues. Depending on the nature of your business, acceptable helpdesk resolution times will vary, but a reasonable expectation is within two days. Keep track of the number of queries resolved within your set time frame and the total number of queries to measure your rate of successful resolutions. Measuring this KPI will ensure your employees’ time and the company’s money is well spent.
To learn more about measuring financial health with key performance indicators and establishing sound bookkeeping practices for your new business, visit this quick guide to small business accounting.