As much as I like Balance Sheets and P&Ls, they do have a couple of drawbacks. First, they take time to prepare and interpret. Second, they often bore business owners to death because they contain too much information.

That’s why Key Performance Indicators (KPIs) are such a useful tool. The basic idea: Identify a small set of key numbers that highlight what's happening in crucial areas of your business, then look at those numbers on a regular basis (daily, weekly, monthly) to gauge how your business is performing. This is a lot quicker and easier than plowing through a full set of financials.

There are tons of different KPIs out there and the concept can be overwhelming at first, but it’s not rocket science. At Scooter, we focus primarily on financial KPIs (because we’re accountants) and here are a few examples to show you what I mean:

• Total Revenue: No surprise here, every business owner wants to know what’s happening with sales/revenue. It’s nice to look at this month’s total (with a quick comparison to last month’s) and your YTD revenue, as well.

• Gross Profit: Tells you how much profit the business is making before operating expenses have been paid. Accountants like to look to look at this number in both dollar and percentage terms (the percentage figure is called “Gross Margin”).

• Operating Expenses: This includes all the expenses the business incurs during its day-to-day operations (rent, payroll, advertising/marketing, software expenses, etc.). In addition to looking at the total, it’s nice to have a small chart that gives you a visual breakdown of what your top five or ten monthly expenses are (that’s a lot more useful than just seeing one big fat number).

• Net Profit (or Net Income): Arguably the most important number of all. Net profit is the amount of money you’ve made (or lost) after all COGS and operating expenses have been paid.

• Cash on Hand: I’m stating the obvious here but cash on hand (which mostly consists of your bank balance) is a number that needs to be watched closely every day. Over time you should develop a feel for how much cash the business needs to have on hand to cover its normal liabilities and expenses (a “target number,” so to speak). And if your cash on hand falls significantly below that target number, you should ring the cow bell.

• Accounts Receivable (A/R): Another crucial number, almost as important as cash. In addition to tracking your total A/R, you should keep a close eye on your A/R aging summary report and any overdue customers or invoices.

• Quick Ratio: One of my favorite ratios. The quick ratio (or “acid test”) tells you if your business has enough cash and liquid assets to pay its current liabilities. A quick ratio of less than one is a trouble sign, it means you don’t have enough money to pay your bills.

In addition to financial KPIs, there non-financial KPIs that can be equally if not more useful to business owners. These are trickier to pin down because they don’t come straight from your financial data and need to be created from scratch. However, they can be especially valuable because they highlight important things about the business that aren’t reflected in the financials.

Examples of non-financial KPIs include things like number of units sold, number of orders shipped, number of new customers, customer conversion rate, sales per square foot (a famous KPI for retailers), total headcount, employee turnover, and various customer service metrics.

Building a KPI system isn’t easy, it takes hard work and persistence. But the payoff can be big because all of a sudden you’ve got a small, easy-to-read set of numbers that tell you what’s happening in critical areas of your business. And sometimes having a few important numbers you understand is better than having fifty less important numbers you don’t.