FinOps Partners

Top 12 Metrics SMEs Should Include in Annual Reports

As a small business owner, having a precise image of your company’s financial situation is essential. Is your company healthy and ready for new challenges or are you slowly slipping away on the path to insolvency? Your annual reports can offer the insights you need, as long as you are tracking the right financial metrics and KPIs.

For SMEs focused on making a positive impact, including elements like operating cash flow, revenue growth rate, or net profit in their financial reports to stakeholders and investors can also mean an increase in trust.

Over the years, we’ve seen many SMEs evaluating their financial performance through the wrong KPIs and metrics. Their lists lacked essential elements or were so overloaded that potential investors had trouble getting the big picture.

We’re aiming to shed some light on this area, so here is a list of the 12 most important financial metrics and KPIs you need to include when creating an annual report.

1. Revenue

Revenue is the amount a company generates by selling its services or products. It is sometimes referred to as gross income, top line or simply sales.

While the basic calculus formula is straightforward – multiply the number of units sold by the average sales price – you may get a different result depending on the accounting method you choose.

If you use accrual accounting, you will include credit sales in your revenue. Cash accounting, on the other hand, only takes into account the sale when the cash is received.

A steady increase in revenue over the years is good news for investors and stakeholders as it shows sales are strong and the company is growing.

2. Expenditure

All the payments a SME makes to acquire goods or services are considered expenditures. An expenditure can either be a payment in cash or a credit the company contracted to invest in new assets. Expenditures also include purchases made to decrease liability or upgrade/repair assets.

The difference between an expenditure and an expense is that the first is recorded only once, when you purchase the goods or service, whilst the second accumulates over time from the costs of day-to-day operations.

Recording expenditures helps companies to anticipate their revenue and prevent overspending. According to a Statista report, in 2023, 36% of SMEs in the UK faced financial difficulties generated by increased costs – keeping an eye on expenditures could help ameliorate this situation.

3. Net Profit

Once you have determined your gross profit or revenue, you can calculate your net profit. This is the amount of money your company is left with after deducting all expenses. Observe that we said expenses, not expenditures. Expenses often include operating costs, interests, taxes, and depreciation.

This is a very important success indicator. An increase in annual net profits shows that you have a strong growth strategy, which is paying back.

If you need a number to compare, the average profit made by SMEs in the UK last year was £13,000.

4. Revenue Growth Rate

Revenue growth measures how much your revenue has increased compared to the value from the previous year. For example, if in 2023, your revenue was £2,000,000 and this year it is £3,000,000, your company has acquired a 50% revenue growth.

Although quick revenue growth may seem like a great achievement, most stakeholders want to see a slower but steadier evolution, as this shows the company can survive in the long term.

5. Operating Cash Flow

Companies use operating cash flow to determine if they are able to generate enough cash from their main operations without resorting to external financing. This metric excludes investments such as acquiring capital equipment as well as dividend payments or borrowing money.

Operating cash flow shows how much cash you have available to face other expenses and is often a criterion that loan institutions use to determine the amount of money you can borrow without risks.

6. Customer Acquisition Cost (CAC)

This is an important KPI that tracks your marketing and sales efforts and how they are rewarded. More precisely, the customer acquisition cost shows how much money you spend on average to gain a new customer.

The expenses often include marketing and sales employees’ salaries, marketing and sales data collection technology, subscriptions to marketing tools, digital or traditional marketing campaign costs, gifts for potential customers etc.

Customer acquisition cost helps you estimate if your strategy is working. For example, if you are spending £300 to acquire a new customer but the annual revenue they bring is £15,000, you’ve made a good investment.

7. Debt-to-Equity Ratio

As the name says, the debt-to-equity ratio compares the company’s funding that comes from debt with its shareholder equity. This metric helps determine if the company relies heavily on debt, which can be a red flag for investors and financial institutions. A debt-to-equity ratio above 2 is considered high and suggests that the company may not be able to repay its debts.

On the other hand, if the debt-to-equity ratio is too low, investors may consider that the company doesn’t use its financing opportunities enough in order to acquire growth.

8. Accounts Receivable Turnover

Accounts receivable turnover measures how efficient a company is in collecting payments from its customers. The faster you manage to get money into the company’s accounts the better. Investors often compare your accounts receivable turnover within the same industry to see if you are on par with your competitors. If your turnover is low, this could mean that you need to rethink your collection process or some of your customers are no longer financially viable.

9. Accounts Payable Days

Also known as days payable outstanding this metric measures how many days a company needs to pay its invoices and suppliers. If this metric is high, it shows that your company takes longer to make payments, which could mean that it chooses to preserve a higher cash flow temporarily for investments. However, if you are frequently late in paying your debts this could translate into a tense relationship with your suppliers and penalties that could increase your costs.

In your annual report, you should focus on determining the cause of a high or low APD. If it’s high, does your company retain cash for investments or is it struggling to make ends meet? And if it’s low, aren’t you losing investment opportunities by paying your suppliers too soon?

10. Churn Rate

The churn rate measures the percentage of customers who stop doing business with your company during a certain time period. Also known as the rate of attrition or customer churn, this metric is the opposite of the growth rate. A high churn rate can show that your products or services are not competitive enough and that you are losing clients in favour of the competition.

11. Cash Runway

Your company is spending cash at a certain rate, and you need to know how fast it’s happening. This is the cash runaway or burn rate. Let’s look at an example: if your company currently has £500,000 in cash, and you spend £40,000 every month, you’ll run out of cash in 12,5 months unless you find other ways to improve cash flow.

12. Break-Even Point

Calculating the break-even point helps you determine the level of sales at which your revenue for a product equals the money you spend for producing it. This metric allows you to understand the minimum revenue your company needs to generate in order to avoid losses. If you have only reached this level for your last reporting period, this may indicate the need for a better investment strategy.

Why these Metrics Matter for Investors

Keeping track of your financial metrics and KPIs and providing clear reports to your investors can help them evaluate the current financial state of your company. Investors need to know if your company is healthy and can sustain growth in the future.

Establishing clear metrics and KPIs and following them shows that your company is efficiency-oriented, but it also tells investors that you are transparent. This strategy can help you attract more capital in the future.

Do You Need Professional Help in Tracking Your KPIs?

Even if we’ve discussed the most important financial metrics and KPIs an SME should measure, depending on your industry, there may be other aspects you need to take into account. Our CFO service can help you identify the elements you need to measure to make sure that your company not only looks good in financial reports but is truly healthy financially.

Collaborate with us to implement a reporting structure that works for your business models. At FinOps Partners we’ve made a mission of helping SMEs and charities get a clearer view about their financial situation so they can plan better in the future