Most beauty business owners know about the big numbers that tell them if their business is in good shape: sales revenue, profit margin, customer retention. But with most small businesses in the beauty industry reliant on strong, stable relationships with suppliers, it’s just as important to keep an eye on more specific accounting metrics.
Calculating these four accounts payable KPIs (key performance indicators) is vital for keeping your business on track. All major beauty suppliers are also tracking the corresponding metrics through their accounts receivable platforms, so performing well on each will help you stay in their good books too.
This is a ratio that shows how long it takes for an invoice to go from ‘received’ to ‘paid’ within your business. Basically, the smaller this number, the faster you’re paying supplier invoices. On the flipside, a bigger number could indicate cash flow problems, which is why it’s important to calculate DPO quarterly.
Your suppliers’ accounts receivable department will be measuring the inverse of this with Days Sales Outstanding (DSO) – how long it’s taking them to receive payment from you. Again, this is a crucial metric used to evaluate the strength of their relationship with you, making your DPO an important number to pay attention to.
Calculating your DPI ratio tells you how long it takes for your inventory in stock to become a sale. A smaller number here is a great sign of business health, as it means products are selling quickly and bringing in revenue faster. But product-based businesses have to make sure their stock levels can keep pace with DSI – the two need to be carefully balanced.
A high DSI might prompt you to take a closer look at your inventory. Are there specific categories or product lines that aren’t selling well? Does it signal a bigger trend across the beauty industry? It could be a signal that it’s time to talk to your suppliers about managing and planning inventory levels so it doesn’t hurt cashflow or other business metrics.
Whether it’s for early payment or order volume, most of your suppliers will offer discounts to incentivise repeat business. Taking advantage of supplier discounts can have a significant impact on your profit margin, so it’s worth understanding exactly how much could be saved across the range of brands you purchase from.
Once a quarter, calculate both how much money you saved by getting supplier discounts and the total value of ‘missed’ discounts. If the percentage of discounts captured is low, you’re leaving money on the table!
It might seem obvious, but many small business owners don’t keep track of how much money they lose to overdue payment penalties. It can be easy to ignore one or two late invoices, particularly if the interest accrued or late fees are small – but little costs quickly add up.
Aside from being an unnecessary additional cost, a high number of invoices incurring late penalties (even if they’re small) is often an indicator of issues elsewhere in your business. Is it due to cash flow problems? A lack of time or poor organisation systems? Using automated tools instead of doing things manually is an effective way of nipping late payments in the bud.