Key Takeaways
- Gross Margin shows how efficiently your business is producing and selling its products or services.
- Customer Concentration is a way to assess how dependent your business is on a small number of clients.
- Aging of Accounts Receivable shows how quickly customers are paying you.
- Cash Needs reflects the amount of cash your business needs to run on a monthly basis.
Running a small business requires juggling a variety of responsibilities, so sometimes detailed financial tracking gets pushed to the wayside.
When serving customers and running daily operations demands most of your time, taking a step back to look at the bigger picture of your small business’s performance and growth is not a simple task.
Where do you start? What should you be looking for?
Let’s break down the 4 most important key performance indicators (KPIs) for you to keep an eye on.
Carving out just a few minutes each month to track these 4 metrics can make a significant difference in how you steer your business forward.
These KPIs offer a snapshot of your business’s financial health and can help you make smarter, faster decisions.
Why Metrics Matter
Half the battle is identifying objective metrics by which you track your business’s performance. Once you know exactly what to look for, you’ll have insights that:
- Identify strengths and weaknesses in your business model
- Spot trends before they become problems
- Make informed decisions about pricing, staffing, and inventory
- Communicate more effectively with lenders, investors, and partners
Gross Margin
Gross margin represents the percentage of revenue that exceeds the cost of goods sold (COGS). It shows how efficiently your business is producing and selling its products or services.
How To Calculate It
Gross Margin (%) = (revenue-cost of goods sold)/revenue × 100
Example
If you sell a product for $100 and it costs $40 to produce, your gross margin is:
($100−$40)/$100×100= 60%
This means you retain 60 cents for every dollar of sales, before accounting for overhead and other expenses.
Pro Tip
Track gross margin by product line or service category. This allows you to double down on high-margin offerings and reevaluate or reprice low-margin ones.
How To Calculate It
Gross Margin (%) = (revenue-cost of goods sold)/revenue × 100
Example
If you sell a product for $100 and it costs $40 to produce, your gross margin is:
($100−$40)/$100×100= 60%
This means you retain 60 cents for every dollar of sales, before accounting for overhead and other expenses.
Pro Tip
Track gross margin by product line or service category. This allows you to double down on high-margin offerings and reevaluate or reprice low-margin ones.
Customer Concentration
Customer concentration measures how much of your revenue comes from your largest customers. It’s a way to assess how dependent your business is on a small number of clients.
Why It’s Important
High customer concentration can be risky. If one major client stops doing business with you, it could significantly impact your revenue and cash flow. Monitoring this metric helps you:
Customer Concentration (%) = amount of revenue from top customers / total revenue × 100
Example
If your top customer brought in $90,000 and your total revenue was $200,000, your customer concentration is:
($90,000/$200,000)×100= 45%
This means 45% of your revenue is coming from just one client, indicating you may want to expand your customer base.
Pro Tip
Aim to keep any single customer below 20–30% of your total revenue. If that’s not possible, consider strategies to expand your customer base or offer new services to existing clients to reduce risk.
Why It’s Important
High customer concentration can be risky. If one major client stops doing business with you, it could significantly impact your revenue and cash flow. Monitoring this metric helps you:
- Diversify your customer base
- Reduce dependency on any single client
- Strengthen your long-term financial stability
Customer Concentration (%) = amount of revenue from top customers / total revenue × 100
Example
If your top customer brought in $90,000 and your total revenue was $200,000, your customer concentration is:
($90,000/$200,000)×100= 45%
This means 45% of your revenue is coming from just one client, indicating you may want to expand your customer base.
Pro Tip
Aim to keep any single customer below 20–30% of your total revenue. If that’s not possible, consider strategies to expand your customer base or offer new services to existing clients to reduce risk.
Aging of Accounts Receivable
This metric tracks how long your invoices have been outstanding. It’s typically broken down into aging buckets (e.g., 0–30 days, 31–60 days, etc.) to show how quickly customers are paying.
Why It’s Important
Slow-paying customers can create cash flow issues, even if your business is profitable on paper. Monitoring accounts receivable aging helps you:
Accounts Receivable Aging (Days) = Aging of accounts receivable = average accounts receivable x 360 days / credit sales
Example
If your average accounts receivable is $450,000 and your credit sales are $900,000:
($450,000×360)/$900,000= 180 days
This means it’s taking, on average, 180 days for your customers to pay you the money they owe.
Pro Tip
Use accounting software to generate aging reports automatically. Follow up on overdue invoices promptly and consider offering early payment discounts or charging late fees.
Why It’s Important
Slow-paying customers can create cash flow issues, even if your business is profitable on paper. Monitoring accounts receivable aging helps you:
- Identify late-paying clients
- Improve your collections process
- Forecast cash flow more accurately
Accounts Receivable Aging (Days) = Aging of accounts receivable = average accounts receivable x 360 days / credit sales
Example
If your average accounts receivable is $450,000 and your credit sales are $900,000:
($450,000×360)/$900,000= 180 days
This means it’s taking, on average, 180 days for your customers to pay you the money they owe.
Pro Tip
Use accounting software to generate aging reports automatically. Follow up on overdue invoices promptly and consider offering early payment discounts or charging late fees.
Cash Needs
Cash needs refer to the amount of money your business requires to cover its monthly operating expenses, including payroll, rent, utilities, taxes, and other overhead.
Why It’s Important
Cash is the lifeblood of your business. Even profitable companies can fail if they run out of cash. Understanding your cash needs helps you:
If your average monthly expenses are $4,000 and you have $10,000 in the bank, you have:
$10,000-$4,000=2.5 months of runway
This means, without any further income, you have 2.5 months worth of extra cash to operate from before running out.
Pro Tip
Aim to maintain at least 3–6 months of cash reserves. If that’s not feasible, consider setting up a business line of credit or applying for a working capital loan to bridge gaps.
Why It’s Important
Cash is the lifeblood of your business. Even profitable companies can fail if they run out of cash. Understanding your cash needs helps you:
- Avoid liquidity crises
- Plan for seasonal fluctuations
- Prepare for emergencies or economic downturns
- Compare your average monthly expenses to your current cash reserves.
- Add up your total expenses over a period (e.g., 6 months)
- Divide by the number of months to get your average monthly expense
- Compare that to your current cash balance
If your average monthly expenses are $4,000 and you have $10,000 in the bank, you have:
$10,000-$4,000=2.5 months of runway
This means, without any further income, you have 2.5 months worth of extra cash to operate from before running out.
Pro Tip
Aim to maintain at least 3–6 months of cash reserves. If that’s not feasible, consider setting up a business line of credit or applying for a working capital loan to bridge gaps.
What Do You Do With These Insights?
Tracking these four metrics monthly is a great start, but the real value comes from analyzing trends over time.
Are your gross margins shrinking?
Is customer concentration increasing?
Are receivables taking longer to collect?
Use these insights to:
Are your gross margins shrinking?
Is customer concentration increasing?
Are receivables taking longer to collect?
Use these insights to:
- Adjust pricing or reduce costs
- Diversify your customer base
- Improve collections processes
- Secure financing before you need it
Find out how much you could qualify for today!
