KPIs are a fundamental way to measure the success of your company. They help you make strategic decisions and see how well your company is doing. That’s why so many businesses use them today!
There are many financial KPIs. Some are more important depending on the industry you are in. Other KPIs can be used across various sectors. I will break it down into different posts instead of explaining it here.
Before we delve into the KPIs, you need to understand from which reports these KPIs are derived, and to understand that, you need to understand what each report says about your company.
Each of these reports is a KPI, so understanding them is a must for a successful business owner.
Three preliminary financial reports are necessary in your business. From these reports, you tailor more specific ones, but this is ground zero.
These financial reports are:
Income Statement: What is it?
Income statements are a critical financial document for your business. They show what you earn and spend and if the company is making a profit over a specific period. The report can be done monthly, quarterly, or annually.
Your income statement will show:
Revenue (sales)
Expenses
Net Income (profit/loss).
Revenue is your income statement’s top line and your total sales. This could be from product sales, services rendered, or other sources of Income.
Expenses are everything you spend to generate that revenue. This includes the cost of goods sold (COGS), employee salaries, marketing expenses, and other operating expenses.
Net Income is your total revenue minus your total expenses. If it’s positive, you have a profit. If it’s negative, you have a loss.
Balance Sheet: What is it?
The balance sheet is one of your business’s three primary financial statements. A balance sheet is a financial document showing your company’s assets, liabilities, and shareholder’s equity at a specific time. It’s usually done monthly, quarterly, or annually.
Assets are everything your company owns and can use to generate revenue. This includes cash, inventory, property, and equipment.
Liabilities are everything your company owes. This includes loans, credit cards, accounts payable, and other debts.
Shareholders’ equity is the difference between your assets and liabilities. It represents the ownership stake of your shareholders in your company.
Statement of Cash Flow: What is it?
The cash flow statement is one of your business’s three primary financial statements. A cash flow statement shows your business’s cash inflows and outflows over a specific period. It’s usually done monthly, quarterly, or annually.
Cash inflows are the money coming into your business. This includes revenue from sales, interest income, and loans.
Cash outflows are the money going out of your business. This includes expenses like COGS, employee salaries, and rent.
Net cash flow is the difference between your cash inflows and cash outflows. If positive, you have more cash coming in than going out. If negative, you have more money going out than coming in.
These are the three most important financial reports for your business. Now that we understand them, we can break down the different types of KPIs.
Conclusion
In the next post, we will start breaking down and delving deeper into these financial reports to better understand them. In the meantime, if you have questions, please don’t hesitate to email me at john@darwinbusinesssolutions.com, and I will be happy to help.
