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Financial Metric Madness: How SMBs Can Set Meaningful KPIs for Their Business as Part of Their Financial Reporting and Analysis Process

January 4, 2022
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It’s that time of year again when many organizations are busy setting business objectives and planning budgets for the next fiscal year. Part of that effort requires a deep dive into the overall financial health of your organization. That includes analyzing key financial metrics as part of the financial reporting and analysis process to see where you are today to determine where you want to be tomorrow (and how to get there!). For SMBs, evaluating KPIs and performing KPI analytics are where the meaningful details can emerge.KPIs enable you to track the most important metrics for your organization. It offers a critical benchmark for comparison enabling stakeholders to see progress or areas of weakness within a given timeframe. For SMBs in particular, KPIs essentially require you to set clearly defined goals based on your unique industry and business model. Gross profit margin, revenue projections, cash flow and the like are common KPIs, but for SMBs to succeed and grow it’s valuable to consider non-financial KPIs as well.

KPIs Are A Critical Part of Your Financial Reporting and Analysis Process

These intangibles are often hard to quantify, but they are critical to the viability of your business. They may include metrics such as customer retention, customer experience, employee happiness, brand reputation, and even your overall business culture.  Many of these non-financial KPIs may seem like obvious factors to business success. For example, a poor customer experience score will decrease customer retention leading to an increase in the customer churn rate and a decrease in sales which is bad news for the bottom line. There’s no denying these factors play a major role in an organization’s overall long-term success. By taking in the big picture and identifying all the KPIs and metrics that truly matter to the business as part of your financial reporting and analysis, you will be more likely to stay focused on the set objectives.But how do you determine which KPIs your organization should be using? How do you strategically analyze them to achieve your objectives and make a positive impact on your company’s bottom line?  The key for SMBs is to narrow the focus and select only the business goals that are both measurable and actionable. Remember, KPIs are about tracking progress towards a clearly defined objective within a specific timeframe.  Don’t overshoot.Some of the most common KPIs used for SMBs include operating cash flow, gross profit margin, revenue growth rate, market share, customer churn rate, break-even markers, accounts payable and receivable timelines, expense ratio, budget versus actual, and customer acquisition cost.Once you have established which KPIs are likely to be the most relevant for your specific business, the next step is to perform KPI analytics. This hindsight focus is a necessary aspect of planning for the future of the business. It’s a process that enables you to determine how the business as a whole is doing. By evaluating both the outcome KPIs as well as forward-looking KPIs that serve as leading indicators, you can more effectively measure the metrics that are having strategic impact on the business.Outcome KPIs measure past activity. It’s an analysis of both the organization’s effort and the external factors involved which are often well beyond anyone’s control (such as the emergence of a global pandemic). For instance, measuring financial performance by net profit or a project’s return on investment (ROI) can help SMBs see how that activity directly impacted the business. Or perhaps analyzing the results of a marketing effort by evaluating the cost per lead is a valuable metric. Understanding where you are succeeding and where things are currently falling flat is a vital part of running a successful small business. Forward-looking KPIs, the leading indicators, are the drivers that measure which activity will significantly impact the outcomes. These are action oriented and force SMBs to narrowly focus their time to ensure they are managing the business in ways that optimize the organization’s ability to get to the desired outcomes.

Financial Reporting and Analysis – Keeping Your KPIs in Check

It’s incredibly easy to go overboard with tracking metrics, so again selectivity is needed. Is tracking a specific KPI important to measure efficiency or safety or to increase awareness? Or is it merely interesting? This is a judgement call, but one SMBs need to get comfortable making as they set their objectives for the year ahead.By leveraging the power of KPI and KPI analytics as part of the financial reporting and analysis process, SMBs can uncover the best ways to grow and positively impact their organization’s bottom line.

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