Most businesses start by tracking their financial key performance indicators (KPIs), no matter how big or small. This is because they are the most easily accessible and visible numbers that give a snapshot of how the company is doing. Financial KPIs can be divided into two main categories: those that measure a company’s revenue and its costs.
In this article, we will discuss 20 Financial KPIs managers should be aware of.
Further Read: Ultimate Guide on KPIs – Incl. List of 200 KPIs for Businesses
What are Financial KPIs?
Financial Key Performance Indicators (KPIs) are quantifiable measures used to evaluate the performance of an organization regarding its financial objectives. This can involve measuring elements such as the efficiency of investments, revenue growth, or operating expenses, among many other aspects. By analyzing KPIs regularly, businesses can identify areas where they are doing well and where they might need improvement. By understanding these metrics better, organizational decision-makers have a more comprehensive view of their financial standing. They can make informed decisions about adjusting their strategies and operations to maximize profitability. Additionally, the analysis of KPIs helps organizations meet compliance requirements set by regulatory bodies, such as those related to taxation or capital management. Financial KPIs provide critical insight into how effectively an organization is utilizing its resources and achieving its financial goals.
Why is it essential to track Financial KPIs?
Tracking your financial KPIs (Key Performance Indicators) is essential if businesses want to gain insight and understanding into how their finances are performing about their goals. By tracking these indicators, companies can identify areas that need improvement, measure performance, and forecast changes based on current trends. KPIs also help businesses understand their price positioning or the costs associated with providing goods or services. This allows companies to optimize their spending and maximize profits while staying competitive in their industry. Financial KPIs are crucial to business success since they provide valuable insights into a company’s financial operations, allowing for adjustments and proactive management as needed.
Overview of the most critical Social Media KPIs
- Gross Profit Margin
- Gross Profit Margin Percentage
- Operating Profit Margin
- Operating Profit Margin Percentage
- Net Profit Margin
- Net Profit Margin Percentage
- Operating Expense Ratio
- Working Capital Ratio
- Debt-To-Equity Ratio
- Quick Ratio / Acid Test
- Current Ratio
- Berry Ratio
- Return on Assets
- Return on Equity
- Cash Conversion Cycle
- Accounts Payable Turnover Ratio
- Accounts Receivable Turnover Ratio
- Vendor Payment Error Rate
- Budget Variance
- Payroll Headcount Ratio
Explanation of 20 important Financial KPIs
Gross Profit Margin
Gross Profit Margin is a crucial performance metric for business owners, as it reveals the company’s profitability after deducting the cost of goods sold. This measure shows the relationship between net sales and gross profit, or sales minus cost of goods plus any additional expenses incurred. For example, if your company had sales of $100,000 with expenses including $60,000 in cost of goods sold and $10,000 in additional costs associated with sale implementation, then your gross profit margin would be determined by subtracting total cost ($70,000) from total sales ($100,000), equaling a gross profit of $30,000. The resulting gross profit margin would then equate to 30%. As such, this financial tool provides entrepreneurs with invaluable insight into their overall financial health and productivity.
Gross Profit Margin Percentage
The gross profit margin percentage is an invaluable tool for business owners and managers, as it provides a quick measurement of how profitable a company or organization is. It’s important to understand that this figure considers all costs associated with running the business, not just the cost of goods. Take a hypothetical company: if they pay $5,000 each month in overhead and make $50,000 in sales, their gross profit margin percentage would be 67 (5,000 divided by 50,000). This percentage gives insight into the total profitability of the business when taken into account with other factors such as value-added tax or rent. In short, having an understanding of how to calculate your gross profit margin percentage can provide valuable insights into the health of your business or organization.
Operating Profit Margin
Operating profit margin is a handy financial measure to understand the overall health of a company. It indicates how much a company makes from its core operations after subtracting all direct costs from the sales made. The operating profit margin, therefore, gives the user an accurate insight into how efficient the company is in utilizing its resources to generate sales and profits. The higher the operating profit margin generally means that the more successful business is being run, as more money is being kept out of each sale instead of paying for expenses related directly to it. A careful study of this figure can be beneficial for investors interested in buying stock in a company or evaluating their own business’ progress.
Operating Profit Margin Percentage
The operating profit margin percentage is an important measure used to evaluate the performance and efficiency of a company. It measures the company’s operating profits as a percentage of its total revenues. This percentage provides investors and decision-makers with valuable information on the company’s ability to generate profits from its available resources. It helps to compare profitability across companies in different industries, since each industry has its own cost structure and relevancy of factors that impact profitability. A higher operating profit margin reveals more efficient management and better cost control, which benefits businesses looking to maximize their operational results.
Net Profit Margin
A net profit margin is an essential tool used to measure a company’s financial performance, indicating the proportion of each dollar earned that is kept as profit. It is calculated by dividing a company’s net income over its total sales, expressed as a percentage. This metric reveals how much of every dollar earned goes toward profits and can help investors and business owners understand financial health and sustainability. As the saying goes, ‘you gotta spend money to make money’ but with insight into the net profit margin ratio, investors can make informed decisions on where to allocate their resources for maximum return.
Net Profit Margin Percentage
Net Profit Margin Percentage is a financial statistic used to measure the profitability of a business. It is calculated by dividing net profit (income generated after subtracting all expenses and taxes) by total revenue. Net Profit Margin Percentage indicates how well a company is doing and how much profit the business makes from its overall sales. The higher the percentage, the more profitable a company is in its total revenue. Analysts can look at this number to compare different companies or compare one company over some time to get a sense of its health and earnings potential. Understanding Net Profit Margin Percentage can be beneficial when assessing new businesses as part of investment decisions.
Operating Expense Ratio
The Operating Expense Ratio (OER) is a key metric used to measure how efficiently a company runs its operations. The OER calculates the percentage of a company’s operating expenses that are offset by its operating income. This ratio is often used to compare firms in the same industry and can indicate how much each company needs to spend on its operations. A higher OER usually suggests that a company needs to control costs more efficiently, while a lower number means improved efficiency. Companies can use the OER to analyze where they can reduce costs and make more profit, improving the efficiency of their day-to-day operations.
Working Capital Ratio
The Working Capital Ratio is a very important tool for analyzing a business’s overall health. It measures the ratio of current assets to current liabilities and is used as an indicator of a company’s short-term liquidity, meaning its ability to meet short-term obligations. A higher working capital ratio shows that the company is in good financial shape, whereas a lower Working Capital Ratio could suggest specific financial issues. In addition, this ratio can offer insight into how profitable and efficient a business may be working with its current resources. By looking at the Working Capital Ratio, one can make better decisions regarding finances and investments in the future.
The debt-to-equity ratio is an essential financial measure used to determine the relative balance between a business’s debt obligations and equity positions. It can provide insight into how much a company relies on debt or equity financing and if it is taking on too much debt compared to its available equity. This ratio can be used to compare companies from different industries to identify areas of improvement or increased risk. For investors, the debt-to-equity ratio helps explain how leveraged a particular company may be, providing valuable information related to investment management decisions. For example, a high or rising debt-to-equity ratio could indicate that returns could be more significant than those generated by alternative investments with lower levels of risk. Understanding the debt-to-equity ratio provides investors, creditors, and managers with valuable information regarding the financial stability of a business.
Quick Ratio / Acid Test
The quick or acid test ratio measures a company’s ability to repay its current debts due in one year or less. It is calculated by taking the total of all liquid assets, such as cash, accounts receivable and marketable securities, and dividing it by the sum of all current liabilities, including long-term debt, which can be due this year. This indicates the company’s liquidity concerning its obligations – if it falls under one, the business may struggle to meet immediate financial requirements. The quick ratio is often considered a superior method to other calculations related to evaluating a company’s liquidity position because it puts more weight on a business’s realizable assets and disregards inventory, which could be challenging to convert into cash quickly if needed.
The current ratio is an essential financial indicator that helps analysts and investors to measure a company’s ability to pay off its short-term obligations. The current ratio is calculated by dividing the total current assets by the total current liabilities of a company. It allows one to assess how well Solvency risk is being managed and how liquid the company’s assets are. A higher result demonstrates that a company typically has enough liquid assets on hand to cover its short-term liabilities, indicating a healthier financial position. Companies with low current ratios may need corrective measures such as increasing working capital or reducing debt levels. Ultimately, while not necessarily indicative of immediate solvency problems, the current ratio is still essential for understanding a company’s financial health from rigorous financial analysis.
The Berry Ratio is a measure of risk in investing, developed by Graham and Dodd in their 1934 classic “Security Analysis.” It allows investors to compare a stock’s volatility relative to its dividend size. By comparing two stocks within a sector, investors can anticipate how a stock’s volatility may evolve in response to dividend changes. A ratio under 2.0 indicates a relatively safe investment while one above 2.5 suggests caution due to heightened risk. Knowing these values provides an investor with important insights when assessing potential investments, as it will give an idea of how much risk versus reward they might be able to expect. While the Berry Ratio is not used as frequently as other measures, such as the Sharpe or Sortino ratios, it remains an exciting tool that assists investors and business analysts in making informed decisions.
Return on Assets
A key performance indicator (KPI) called ‘return on assets’ can show organizations how efficiently they use their available resources. It’s the overall amount of a business’s profits divided by its total assets and can reveal how profitable a company is compared to its competitors. A ratio above 1 indicates that the company is making a profit, while anything lower than 1 may represent that the company needs to produce more to cover the costs of its assets or that certain investments need to provide more returns. Organizations should identify their goals and track and analyze returns on assets over time to measure success and adjust strategies accordingly.
Return on Equity
Return On Equity (ROE) is a key performance indicator used to measure the profitability of a company relative to the equity invested by its shareholders. The ROE KPI provides a reliable indication of how efficiently management has used its equity investments to generate profits and increase shareholder value. It is calculated by dividing net income after taxes by total equity or by subtracting dividend payments from net earnings and then dividing that number by total equity. Return on Equity measures how well management has utilized investor resources and the organization’s operating performance with the money that was reinvested into the business. An increasing ROE KPI may signal increased efficiency and improved utilization of resources, while a declining ROE can signify an inefficient use of investment funds despite favorable sales results.
Cash Conversion Cycle
The cash conversion cycle is an essential financial metric used to measure the time it takes for a company to go from paying its suppliers to receiving cash from its customers. This valuable information can help managers and investors gain insights into a company’s liquidity, profitability, and efficiency in operations. The cash conversion cycle helps companies understand the components that cause their cash to move in and out of business over time, including inventory acquisition and sales, accounts receivable collection time, and accounts payable payment time. By closely looking at this metric regularly, business owners can reduce their cycle times and improve operational efficiency. Furthermore, investors use this indicator as a litmus test for understanding the health of businesses they are considering investing in.
Accounts Payable Turnover Ratio
The accounts payable turnover ratio is used to gauge the effectiveness of a company’s payables system. It measures how quickly a business pays its creditors and suppliers, as it reflects the number of times accounts payable are renewed each year. Going beyond simple cash flow concerns, this ratio also provides insight into how well a company keeps track of its outstanding obligations and manages its relationships with suppliers. Additionally, it can impact a business’s creditworthiness since lenders pay close attention to a company’s ability to manage its liabilities. Ultimately, maintaining effective accounts payable turnover ratio is essential in ensuring smooth finances for any business.
Accounts Receivable Turnover Ratio
The Accounts Receivable Turnover Ratio is a vital financial metric that helps professional analysts and investors understand the solvency and liquidity of a business. It reveals how quickly an organization collects payments for services and products sold on credit. A higher turnover ratio implies quicker collections which significantly improves the cash flow and shows that customers are satisfied with their purchases. In contrast, a lower turnover ratio could mean bad debt provision, slow payment collection or inefficient management of credit policies – all potential red flags to consider when assessing a company’s financial health. Therefore, analyzing this metric is extremely important for making informed investment decisions.
Vendor Payment Error Rate
Errors in vendor payments can have disastrous ramifications for companies, both financially and reputationally. The vendor payment error rate is a metric that helps businesses better understand the accuracy of their payments. It compares the total number of errors with the number of monthly transactions to determine the rate at which errors occur. Monitoring this rate helps companies pay vendors correctly and promptly while avoiding costly mistakes due to inaccurate data or insufficient data entry processes. To paint a clearer picture of the situation, vendor payment error rates can be tailored to each company’s specific industry, helping businesses gain insight into where their processes may fall short and how they can improve to become more efficient.
A budget variance KPI (Key Performance Indicator) helps businesses to determine if their performance is meeting expectations. This measure looks at the difference between the allocated budget and the actual costs of a project, allowing organizations to spot variances from the anticipated plan quickly. With this real-time feedback, they can better align their operations with their budgets, ensuring that resources are used as efficiently as possible. A budget variance KPI can be immensely valuable in helping businesses identify areas that need improvement or ensure that current goals are achievable. They can adjust accordingly by understanding any changes or inconsistencies in budgeting and cost estimates. Companies can use these KPIs to construct an oversight plan to optimize spending while achieving desired results.
Payroll Headcount Ratio
The payroll headcount ratio is an important metric to allot resources and calculate the business’s cost effectively. It divides the total payroll expenses in a given period by the number of employees within that period. This ratio allows employers to understand how much they need to invest for each employee for their business to run successfully and efficiently. Companies can use this ratio to determine how many employees are required or whether salary increases are necessary to make the business more competitive. Additionally, since it considers multiple variables like salaries, bonuses, benefits, etc., employers can make more informed decisions on matters related to their personnel budget.