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5 Financial KPIs to Boost Profitability and Growth in Your MSME

For MSME (Micro, Small, and Medium Enterprise) owners, wearing multiple hats is an everyday task. Between managing operations, marketing your business, and keeping customers happy, it's easy to let financial tracking fall by the wayside. However, having a firm grasp on your business's financial activities is crucial driving to the financial health and success of an organization.

We will explore five essential financial KPIs (Key Performance Indicators) that every MSME owner should track, highlighting their significance and how they contribute to the financial success of their business:

May 1, 2024

1. Revenue Growth:

What it measures: The overall increase in your sales over a specific period (month, quarter, or year).
Why it's important: Revenue growth is a fundamental indicator of your business's ability to attract customers and generate income. It reflects the effectiveness of your marketing, sales efforts, and product/service offerings.
How to track it: Compare your total revenue from one period to the previous period. You can calculate the growth rate as a percentage for better analysis.
Actionable insights: A steady increase in revenue indicates a healthy business. A decline might necessitate a review of your marketing strategy, pricing, or product offerings.

2. Profit Margin:

What it measures: The percentage of revenue remaining after accounting for all your business expenses.
Why it's important: Profit margin shows how efficiently you convert sales into actual profit. By monitoring profit margin, MSME owner can assess the efficiency of production processes, pricing strategies, and cost management, enabling them to make data-driven decisions to improve profitability and maintain a competitive edge. A healthy profit margin ensures your business is sustainable and can generate enough income to reinvest in growth.
How to track it: Divide your net profit (revenue minus expenses) by your total sales and multiply by 100 to get the percentage.
Actionable insights: A consistently low profit margin might necessitate cost-cutting measures, exploring ways to increase revenue, or a combination of both.

3. Accounts Receivable Turnover Ratio

What it measures: It measures how well your customers pay their invoices within an allotted timeframe like 30 days or 45 days.
Why it's important: If your customers are dragging their feet and paying their invoices late, it can seriously harm your financial health. That’s why the accounts receivable turnover or debtor’s ratio is an important KPI.
How to track it: Divide your net annual credit sales by average accounts receivable.
Actionable insights: A high ratio is desirable, as it indicates that the company’s collection of accounts receivable is frequent and efficient. On the other hand, a low accounts receivable turnover ratio suggests that the company’s collection process is poor and need to improve collection from the customers.

4. Cash Flow:

What it measures: It measures the movement of cash that moves in and out of a business during a particular period, say a month, quarter, or year. It provides a complete view of how an organization manages its liquidity. It consists of :
Operating Cash Flow: Cash generated or used in core operational activities of a company, like sales and expenses.
Investing Cash Flow: Cash used for investment activities, including purchasing assets (like equipment or real estate) or selling investments.
Financing Cash Flow: Cash related to financing activities, such as borrowing or repaying loans, issuing or buying back shares, and paying dividends.
Why it's important: Cash flow is the lifeblood of your business. Monitoring it ensures you have enough cash readily available to cover your ongoing expenses and avoid cash shortages.
How to track it: Create a cash flow statement that tracks your incoming cash from sales and other sources, and your outgoing cash for expenses like rent, salaries, and inventory.
Actionable insights: A negative cash flow indicates your business is spending more than it's bringing in. You might need to improve collections from customers, negotiate better payment terms with suppliers, or explore additional funding options.

5. Debt-to-Equity Ratio:

What it measures: A measure of how much your business finances are funded by debt (loans) compared to equity (owner's investment). This ratio measures the extent of your business leverage.
Why it's important: This ratio indicates your business's financial leverage. A high debt-to-equity ratio can make your business vulnerable to economic downturns.
How to track it: Divide your total liabilities (debts) by your total shareholders' equity.
Actionable insights: A very high debt-to-equity ratio might suggest a need to explore an alternative financing option or focus on debt repayment strategies.

These KPIs are just a framework to get you started. Depending on your specific industry and business model, you would need to track additional financial metrics. However, by closely monitoring these key indicators, you can gain valuable insights into the financial health of your business, identify potential problems early on, and make informed decisions that drive sustainable growth. Further, if you wish to get a quick assessment on your company’s financial health or would like us to develop similar metrics specific to your company, do get in touch with us!