Track your financial performance
It's important to track and analyse your business's financial performance to make sure your business is running efficiently. Knowing exactly where you spend and earn money could help you identify problems early, find time and cost savings, and improve how you run your business.
Read about the key outcomes you should be tracking to make sure your business is running smoothly.
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Key performance indicators
A key performance indicator (KPI) is a performance measure that can be benchmarked internally against your progress over time or against your industry sector peers and will help you focus on achieving your business goals.
- are achievable and quantifiable (i.e. able to be measured)
- align to your business goals
- focus your attention on areas that are most important to your business success.
Establishing effective KPIs
Effective KPIs can be:
- output orientated—for example, the number of items sold or manufactured per week
- input orientated— for example, the number of hours required to manufacture an item or the level of wastage (such as food discarded in a restaurant or cafe)
- financial—for example, ratios that measure the proportion of costs relative to total sales.
The easiest KPIs to establish for your business are financial ratios that can be calculated from your business financial statements. Any KPI you develop should follow the 'SMART' acronym:
Understanding financial ratios
A ratio is a means of comparing one number to another. Ratios containing 1 or more financial figures is called a 'financial ratio'. You can use ratios to simplify financial data to monitor and improve your business performance.
Use ratios to:
- assess how your business is performing
- find areas of underperformance
- identify potential for improvement
- judge how a change in one area of your business may affect other areas
- set goals for your business.
There are a range of ratios available to use but the most important, and most common, financial ratios are explained in our quick reference ratios infographic (JPG, 490KB).
Use our ratio calculators to help assess your business’s profitability, liquidity, operating efficiency and leverage.
Using ratios in your business
In financial analysis, ratios may be expressed as the ratio, rate or percentage, depending on your preference.
To provide useful meaning, financial ratios need to be compared with, for example:
- the trend of your results over the past year or so (i.e. trend analysis)
- the results by other competitors (if these are available)
- industry benchmarks or general business standards
- budgeted results
- the effect of economic conditions.
Learn more about key financial measures and ratios.
Seek professional advice
Talk to your financial adviser for recommendations on the most suitable ratios for your business. They will also be able to show you how to produce reports to calculate and monitor them.
Ratios and benchmarking
When you start to analyse the figures from your financial ratios, you can use them to benchmark your business.
This will help you assess how your business is performing by comparing it to other businesses in your industry. You can use this information to improve the financial performance of your business.
Business and industry associations often collect financial data and make it available online.
Non-financial ratios can also be important to highlight issues that may not show up on financial records. This could include problems with staff turnover, client dissatisfaction or inefficient use of resources such as material inputs.
Learn more about non-financial ratios.
- Last reviewed: 20 Dec 2021
- Last updated: 20 Dec 2021