5 Key Performance Indicators For Your Business
You may have a gut feeling that your business is humming along smoothly — and you might be spot on. But there is no substitute for concrete numbers when it comes to measuring your business’ financial health. That’s where financial KPIs — key performance indicators — come in.
KPI is a blanket term for the types of markers that businesses use to measure performance in a variety of areas, from marketing to HR to finance. Keeping close tabs on your small business’ financial performance is essential to long-term success. These five financial KPIs will help you answer the question: Is my business meeting its goals?
1. Gross Profit Margin
Your gross profit margin tells you whether you are pricing your goods or services appropriately. Here is the equation to calculate this:
Gross profit margin = (revenue – cost of goods sold)/revenue
Your gross profit margin should be large enough to cover your fixed (operating) expenses and leave you with a profit at the end of the day (see #2 and #3, below).
2. Net Profit
This is where the rubber hits the road. Your net profit is your bottom line — the amount of cash left over after you’ve paid all the bills. You can figure out your net profit using simple subtraction:
Net profit = total revenue – total expenses
For example, if your sales last year totaled $100,000 and your business expenses for rent, inventory, salaries, etc. added up to $80,000, your net profit is $20,000. If you are a sole proprietor, your salary or draw will come out of your net profit, so it’s vital that this amount be enough to cover your personal needs plus enough extra to build reserves that can keep your business operational during slow periods.
Financing is also a possibility to help smooth out seasonal fluctuations. Many companies go this route to keep things moving during the down season.
3. Net Profit Margin
Net profit margin tells you what percentage of your revenue was profit. The equation is simple:
Net profit margin = net profit/total revenue
In the example above, your net profit margin is 20 percent. This metric helps you project future profits and set goals and benchmarks for profitability.
4. Aging Accounts Receivable
If your business involves sending bills to customers, an accounts receivable aging report (most likely a standard report in your accounting software) can be eye-opening. If customer A consistently pays her bills within 15 days, while customers B, C, and D drag their payments out to 90 or even 120 days, you may have found a root cause of your business’ cash flow problems. It could be time to start charging interest on overdue accounts or let go of slow-paying clients.
Invoice financing is also an option that can help you capitalize on outstanding invoices.
5. Current Ratio
This accounting term describes the ability of a business to pay its bills. It can be calculated like this:
Current ratio = current assets/current liabilities
The resulting number should ideally fall between 1.5 and 3. A current ratio of less than 1 means you don’t have enough cash coming in to pay your bills. Tracking this indicator may give you advance warning of cash flow problems, especially if your current ratio dips into the danger zone between 1.5 and 1.
Use these strategies to keep understand some of the numbers in your business. Set your business up for success by leveraging the expertise of our trusted Aberdare Business Solutions advisers.
For more information or a business evaluation please call our office at 281.599.3380 or email email@example.com.
Victims of hurricanes Harvey, Irma, and Maria get relief from Congress. They can take casualty losses from the storms even if they don’t itemize. They’re able to deduct uninsured personal losses more than a $500 threshold without regard to the 10%-of-AGI offset that generally applies to the deduction. 2016 income can be used to figure the 2017 earned income tax credit. The same applies for the child tax credit. This will prevent a cut in these tax breaks for lower-incomers whose jobs have been suspended or lost due to the hurricanes.
The 10% penalty on pre-age 59½ payouts from retirement accounts is waived, if the IRA or retirement plan withdrawals are not greater than $100,000. The income tax due on such distributions can be spread over a three-year period. Amounts recontributed to the plan or IRA during that span will be treated as rollovers, and tax paid on those amounts can be recovered by filing an amended Form 1040.
Victims can borrow more from company retirement plans such as 401(k)s, up to the lesser of $100,000 or 100% of the account. Loan repayments can be deferred. The 50%-of-AGI limitation on charitable donations is suspended for any cash donations to qualified charities that aid victims of Harvey, Irma and Maria.
Corporations can fully deduct cash donations for hurricane relief. The usual 10% of taxable income limit does not apply to such contributions. There’s a special break for hurricane-affected firms that keep paying workers even though business operations have been suspended in the wake of the storms. They get a 40% tax credit for up to $6,000 of wages paid to each idle employee.+���
IRS’s simplified per diems for lodging, meals, and incidentals are going up. In high-cost localities, employees can get up to $284 each day free of tax. In other areas, their daily stipend is capped at $191. Both amounts are up $2.
Businesses using this method have the choice to use these higher rates as of Oct. 1 or wait until Jan. 1, 2018. Firms can opt instead to use these higher rates as of Oct. 1 or wait until Jan. 1, 2018. Firms can opt instead to use federal per diems separately figured for hundreds of cities.
No change to the rates for meals and incidentals only, this stayed at $68 per day in high-cost areas and $57 in other locations. Self-employed individuals on travel can use these rates in lieu of keeping receipts, but their lodging expenses must be sustained separately. They cannot use the full $284/$191 per diems. The per diem rate solely for incidentals is also unchanged at $5 a day.
A Senate proposal on worker classification is drawing praise from business.
The bill from Sen. John Thune (R-SD) would provide a new safe harbor based on three criteria that, if met, would qualify workers as independent contractors:
You won’t automatically be audited for having above-average deductions; however, if your write-offs are excessively large, your audit risk can go up because that is a key factor in the Revenue Service’s return selection process.
Here’s an example where taking large charitable deductions raised a red flag with the agency. A couple was audited after they claimed total charitable write-offs of $142,250 for property donations to Goodwill. Because they couldn’t prove the value of the items donated, the Tax Court disallowed all but $250 of their deduction and slapped them with the 20% penalty for negligence (Ohde, TC Memo. 2017-137).
Charitable deductions can sometimes be lost if conditions are attached by the donor. In this case, the owner of a run-down movie theater wanted to transfer it in a bargain sale to an unrelated, newly formed nonprofit. Since the transferee hadn’t yet received its tax exemption, the building’s owner arranged a bargain sale with another charity but agreed that it could direct a subsequent conveyance to the ultimate transferee. This transfer restriction included in the contract of sale caused the Tax Court to rule that the owner didn’t relinquish dominion and control over the building and that no charitable gift was made (Fakiris, TC Memo. 2017-126).
Worker classification remains a priority. The Internal Revenue Service continues to seek back taxes and penalties from firms that wrongly treat workers as contractors. Unreported or underreported employment taxes make up a big chunk of the overall federal tax gap. The Labor and Justice Departments, along with Individual States also have vital roles to play in ensuring that workers are properly classified by the businesses they work for.
The stakes have always been high, lost taxes for federal and state governments and fewer benefits for workers who are improperly treated as contractors. The importance is magnified with the growth of freelance service gigs. Freelance gigs such as Uber, Rover, Grubhub and Fiverr are making up a growing portion of the part time economy.
To classify workers, the IRS uses three tests, each made up of multiple factors.
The Behavioral Test focuses on whether the company controls or has the right to control what the worker does and how to do the job. Key factors for employee status include instructions about performing the work, evaluation criteria and training.
The Financial Test looks at who controls the economics of the worker’s job. Being able to work for multiple firms and providing your own tools needed for the job are indicative of independent contractor status. Some factors favoring employee status are eligibility for reimbursement of travel costs and payment based on hours worked.
The Type-of-Relationship Test examines how the parties perceive each other. Providing paid vacation and retirement benefits indicates a worker is an employee, as does hiring to provide services indefinitely rather than for a specific time. Written language stating the worker is an independent contractor isn’t determinative.
Aberdare Business Solutions offers a variety of Lunch & Learn Seminars or on-site seminars regarding the above topics. Additionally, we include information pertaining to the Department of Labor and the Texas Workforce Commission. If you are interested in attending a seminar or having us speak at your company or association please contact our office at 281.599.3380 or firstname.lastname@example.org
The cost to become a dog groomer doesn’t qualify for an education tax break through The American Opportunity Tax Credit. The couple in the case has a daughter who after taking one class at a local community college, decided on a different track and enrolled in a dog grooming program with a company aptly named Canine Clippers.
Only tuition paid to accredited postsecondary institutions is eligible for the AOTC, and the parents provided no evidence that Canine Clippers met that standard or that their daughter attended at least half-time (Martin, TC Summ. Op. 2017-73).
IRS is on the prowl for filers who claim large charitable deductions, as a big-game hunter found out after he took a $1.45 million write-off for animal hides, skulls, horns, and other hunting specimens he donated to charity. He claimed the items he gave were of museum quality, with no market comparables, and should be valued at their estimated replacement cost.
The Tax Court disagreed, saying the specimens were commodities, not collectibles, and that fair market value is based on market prices of similar items. The Court allowed a $163,000 deduction, the figure determined by the Service’s appraiser (Gardner, TC Memo. 2017-165).