As a CEO, it’s important to monitor the progress of your business. Outlining and focusing on financial key performance indicators (KPIs) helps you benchmark progress and gives you tangible information to present to your board members.
The seven financial KPIs every CEO should be monitoring and striving to improve:
1. Burn Rate
2. Amount of cash on hand
3. Customer Retention Rate
4. Customer Acquisition Cost
5. Days Sales Outstanding
6. Growth Rate
7. Gross Margins
1. Burn Rate
If your company is still striving to turn a profit, your monthly burn rate is a key indicator of your company’s performance. Burn rate is the amount of negative cash flow each month or the amount of your capital being spent each month prior to generating positive cash flow.
While your board understands that there are sunk costs to doing business, especially with start-ups, they want to ensure that funds are utilized in the most prudent ways possible.
If your burn rate exceeds forecasts or you’re failing to turn a profit as quickly as anticipated, your spending should be reduced.
2. Amount of Cash on Hand
Cash on hand is the amount of money a business has available after it has paid all costs. Cash on hand means any asset available to the company in petty cash, vault cash, prepaid postage, or cash equivalents held in a bank.
The amount of cash on hand provides the company with a working idea of how long the company can continue to operate without generating new revenue. This KPI is particularly important for those who operate in seasonal industries or have mercurial sales cycles.
More specifically, you should be paying attention to the number of months your cash on hand would cover. In recent blogs, we’ve discussed how to increase your short-term cash flow and how to make accurate cash flow projections for the future.
Focusing on your cash flow is one of the most important ways to gauge the state of your business, and it gives you the insight to trim excess spending where needed.
3. Customer Retention Rate
According to the Harvard Business Review, it is anywhere from five to 25x cheaper to retain an existing customer than it is to acquire a new one. When your customers are loyal to your company, you reap immense financial benefits. If you want to decrease your customer churn rate, focus your company’s efforts on customer service and delivering what customers want.
Lowering your customer churn rate by 5% can boost your profitability anywhere from 25% to 95%!. To maintain a low churn rate, focus on creating exceptional customer experiences that result in long-term customer satisfaction.
4. Customer Acquisition Cost
Customer acquisition cost (CAC) is one of the three customer acquisition metrics you need to be tracking. Your CAC goes hand-in-hand with the impact of your customer retention rate.
You should inform your investors about the amount of time it takes to sign new clients, how much manpower and other costs are devoted to customer acquisition, and the amount of time it takes to recover your CAC.
This KPI provides an opportunity for the leadership team to propose ideas for reducing acquisition costs and how to close the gap between CAC and the profit a customer generates.
A financially minded leadership team should be tracking these numbers frequently to assess cash flow and the ROI of the company's customers.
5. Days Sales Outstanding
Days Sales Outstanding (DPO) measures the amount of time it takes for your company to receive a payment.
DPO = Accounts Payable X Number of Days / Cost of Goods Sold (COGS)
What is your average collection period? Your days' sales outstanding metric essentially quantifies the number of days between a sale and the collection of payment. The lower your DSO is, the more cash you have on hand. Present this ratio to show how quickly your customers are paying you.
6. Growth Rate
How fast is your company growing? And, is your growth rate meeting or exceeding what has been projected for your company?
Your board wants to be able to visualize where your company will be in the next year, five years, and beyond. In addition to measuring the growth of your entire company, measure the growth of individual departments, as well.
Use these measurements to determine how to invest resources into areas of your company that are growing.
7. Gross Margins
Your gross margins tell you more than just the percentage of total sales revenue left over after you deduct the costs of goods sold. (See equation below.) It tells you whether or not your pricing model is working. It also tells you if you’re spending too much on goods or resources to generate your product.
Gross Margin Percentage = (Revenue – Cost of goods sold) /Revenue
Is your gross margin percentage as high as it should be? The higher this percentage is, the healthier your business and the happier your investors will be.
CEOs are constantly working to improve the data represented by their financial KPIs. Finding the right financial advisor for your company can help you meet and exceed expectations for your KPIs.
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