Being an Australian business owner, you are not unfamiliar with the process of operating in a dynamic and rather challenging economic environment. You are always on the go in running the day-to-day activities and looking into future growth. However, in the hustle, at least with your business, would you actually be able to tell whether you are doing well or merely existing? Your data, namely, your Key Performance Indicators (KPIs) is the answer. It is not merely the numbers in a spreadsheet but those are the vital signs of what your business is doing, and it is a definite and quantifiable method to check in on the progress through which you are going to achieve whatever you want to achieve.
To most Australian business owners and experienced entrepreneurs, financial KPIs may be a daunting term that is to be left at the hands of the accountants. Yet, having knowledge and tracking of some metrics are important to make more strategic decisions that could change the difference between stagnation and sustainable growth. It does not mean to turn oneself into a financial expert overnight, it is only the ability to have the insight and the comfort to have the right direction in the business. With the correct KPIs, you will be able to stop relying on guesses and begin harnessing data in order to propel your success. In this blog, you will be taken through five vital financial KPIs that any Australian business owner should consider to be part of his or her radar.
1. Gross Profit Margin
The gross profit margin is a metric of profitability of your business in the most basic level. It is the ratio of the revenue that is left after subtracting the cost of goods sold (COGS).
It is one of the fundamental KPIs that are used to measure your efficiency of production and pricing strategy. An acceptable gross profit margin indicates that you are properly handling the cost of your inputs in producing goods or services and offering them at the right prices. A decreasing margin, however, would be an indicator that could either be an increase in the cost of production, inefficient operations or that you have to reconsider your prices. This is one of the KPIs that should be given continual consideration to Australian businesses, particularly those in the retail, manufacturing, and hospitality industries.
2. Net Profit Margin
Where on the one hand Gross Profit Margin will provide a picture of how effective your production is, the Net Profit Margin will afterwards show you the full picture of how profitable your business is. It is the proportion of the revenue remaining after all the expenses, which are operating costs, interest, and taxes are deductible.
This is the bottom line. The net profit margin informs you the number of dollars that your business is earning per dollar of revenue. A high net profit margin shows that there is a viable business model and you are well controlling your overheads. This is a very informative measure to service based companies in Australia where COGS is often low but the operating costs are high and hence the business is run at low cost leading to high operational expenses.
3. Current Ratio
Current Ratio is a liquidity ratio which is used to determine the capability of your company to pay short term liabilities (liabilities that are payable within one year). It is determined by dividing the current assets with current liabilities.
Put simply, The Current Ratio evaluates your business in the short-term financial stability. The ratio of 2:1 or more is usually considered to be healthy as it means that you have twice as many current assets as current liabilities. A low ratio may be an alarming sign, implying that the cash flow issues may be experienced in the near future. To Australian business which depends on credit to keep the business running or manage stock, a healthy Current Ratio is important to obtain financing and prove to the lenders and suppliers that it is a sound business.
4. Operating Cash Flow (OCF)
Operating Cash Flow This is the cash that your company generates due to its normal business operations. It is also more straightforward of the financial health of your business than profit as it is not influenced by non-cash accounting methods such as depreciation.
Any business depends on cash. Positive and increasing Operating Cash Flow means that your main line of business is creating sufficient cash that is used to sustain as well as expand its operations without necessarily having to depend on external funding. It displays the cash you have to settle your dues, invest in new ventures and to survive the economic crunch. A high OCF is a major aspect of autonomy and sustainability in the case of small and medium-sized enterprises (SMEs) all over Australia.
5. Accounts Receivable Turnover
The Accounts Receivable Turnover ratio is used to determine the efficiency of your business in collecting its accounts receivable or the amount of money it is owed by their customers. An increased turnover ratio signifies that your firm is efficient in getting its debts and that its clients are paying punctually.
This KPI is an important indicator of credit and collections policies of your business. The customers who pay slowly can bring about serious cash flow issues even to a profitable business. Through Accounts Receivable Turnover, you are able to detect the problems which may be arising with your credit terms, or credit collection methods or about the financial status of your customers. This KPI is an indispensable monitor to the healthy cash flow cycle of B2B businesses in Australia where credit terms are widespread.
It is only by regularly checking on these five financial KPIs that you are able to get a better insight into the performance of your business and therefore be able to make proactive decisions to achieve growth and profitability. They are your financial dashboard and this gives you the information you require to be able to sail through the dynamics of the Australian market without hesitation.
Take Control of Your Business Growth Today
Your business should not be simply a guessing game it needs to be clear, confident, and controlled. These five key financial KPIs are not just a measure of success, but you are creating it by paying attention to them. No matter whether you need to increase profitability, improve cash flow, or simplify operations, every point matters.We are UBS Accountants and we assist Australian business owners to transform financial information into effective business growth strategies. Allow our professionals to help you to comprehend, monitor, and optimize your primary financial indicators to allow making wise decisions and succeed in any economic environment.