Focusing on the right numbers gives you a clear picture of how your business is doing and helps you make better strategic decisions. Here are the top three key performance indicators (KPIs) every business owner should monitor to maintain and build a strong and healthy business.
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Gross Profit Margin
This shows how much money you’ve made after covering the direct costs of what you’ve sold. It helps you ensure that your prices are appropriate and your costs are reasonable.
Formula:
Gross Profit Margin = (Revenue – Cost of Goods Sold) ÷ Revenue × 100%
If your margin goes down, you might be charging too little, or your costs might be too high.
- Check this number every month
- Compare it to past months
- Service businesses usually aim for 50% or more
- Product-based businesses may have lower margins because of inventory and supply costs
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Net Profit Margin
This shows how much actual profit you keep after paying for rent, salaries, taxes, and other expenses.
Formula
Net Profit Margin = Net Profit ÷ Revenue × 100%
This tells you if your business is really making money or just getting by.
- Check this every quarter
- A good range for small businesses in Canada is 5% to 10%, depending on the industry
- If this number is low, look at where costs are too high or where income has dropped
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Operating Cash Flow
This shows how much cash your business generates from its normal operations. It excludes loans, investments, and financing.
Cash flow is important because even profitable businesses can run into trouble if cash isn’t available when needed.
- Review this every month
- Make sure customers are paying you on time
- Watch your spending
- Try to keep at least 3 months’ worth of expenses available
Why KPIs Matter
Together, these numbers show how your business is doing and where it might need adjusting. Keep an eye on them regularly to stay in control and move forward with confidence.
What’s important about monitoring these numbers isn’t so much the numbers themselves, as that can vary by industry, location, and a number of other factors, but how your numbers are trending. If you are noticing negative trends in one or all of your KPIs, it indicates a need to look into why that’s happening and to take action quickly.
Accounting and Advisory Support for Canadian Business Owners
At KWB, we help business owners make smart, strategic decisions to reduce taxes, increase profit, and reach your goals. Book an introduction meeting with us to learn how we can support your success.
