‘Romeo and Juliet,’ ‘Love and hate,’ ‘Profit and loss,’ ‘Health and Wealth.’
These are a few words that go hand in hand. From a business perspective, ‘health and wealth’ are close allies. If one goes down, it has the other with it, and the consequences aren’t great.
Financial KPIs are something that helps you monitor both business health and business wealth simultaneously.
In this article, we will walk you through financial KPIs, how they differ from operational metrics, and the best 30 financial metrics every business owner should track.
Financial KPIs (Key Performance Indicators) are metrics organizations use to measure their financial health. These KPIs don't just stick to core finances like revenue or profits; they measure every data that has an essence of finance in it.
Financial KPIs, generally, are classified into four categories, namely:
By understanding these KPIs, you are in a better mindset to analyze your business's financial performance. Moreover, you can use the knowledge to iterate your strategies and objectives at any point.
Finance and operations are part of core business functioning. While financial metrics provide information necessary for the survival of a business. The operations KPIs, on the other hand, oversee the execution of day-to-day tasks.
Now, while both KPIs are directed toward the well-being of different departments, some organizations tend to correlate the two.
Let's get this straight.
Operation KPIs might include financial figures, such as working capital, operating cash flows, and cash conversion cycle.
But on the other hand, they also include non-financial data such as employees, customers, supply chain, leads, etc.
While financial KPIs help you determine your operational achievements from a financial perspective, operational KPIs are generally measured for the short term.
The goals and objectives of these KPIs are clearly poles-apart:
To summarize our thoughts on operational and financial KPIs, here's a quick overview:
Gross profit margin, commonly referred to as gross margin, is a profitability KPI that measures the amount of revenue left during a given accounting period after deducting labor and material expenses.
As said, this metric measures the profitability of a business. It calculates the profit earned from each dollar of sales.
Moreover, the metric is an excellent indicator of a company's financial health. It indicates whether the business is capable of handling its operating expenses while retaining money for growth.
Operating profit margin, popularly known as earning before interest or taxes (EBIT), measures the revenue earned by the company after deducting operating expenses, excluding interests and taxes.
Operating profit is also a profitability metric; it calculates the leftover profit after deducting operating expenses. The higher the EBIT, the more profitable your company is likely to be.
If this trajectory declines over time, you might need to identify the pain points and work on improvements quickly.
This KPI measures the sum of revenue left with the company after accounting for all its expenses; this includes short-term and long-term debts, operating expenses, and interests and taxes.
Net profit margin is the ultimate profitability metric. You see, it's the money that stays with you after you've cleared out all your debts and liabilities.
Also, it's a popular metric that helps you compare your business's efficiency to convert sales into profits. As a rule of thumb, a net profit margin above 10% is considered acceptable.
Where,
Levered cash flow is the amount of money left after all the company's financial obligations are met.
LCF defines a company's ability to expand its operations and pay returns to stakeholders. A higher levered cash flow means a higher dividend for shareholders and maximum capital retention for business expansion.
However, even if the levered free cash flow is negative (for a while), it doesn't necessarily mean the company is failing.
As long as the company holds the necessary cash to survive, a negative LCF is both survivable and acceptable.
Working capital measures the surplus of current assets available to meet short-term financial obligations, specifically day-to-day company operations. The current assets can be available cash, investments, accounts receivable, and more.
Working capital is a liquidity metric, i.e. it measures the ability of a business to generate cash quickly. This cash is not based on assumptions; it's hard-core cash ready to be put to work.
A cash-deficit company may find it hard to survive in the market. Hence, a high working capital demonstrates a healthy business.
However, a surprisingly higher working capital may indicate that your assets are not being utilized to the fullest or the firm is not investing surplus money.
The current ratio measures an organization's ability to pay its short-term liabilities within a year. Unlike working capital, this KPI expresses itself in ratios instead of dollars.
A Current Ratio of less than one indicates that your company will not be able to fulfill all financial obligations for the year unless there's an additional cash flow.
Financial experts say a healthy current ratio is between 1.5 and 3. Moreover, stakeholders generally use the current ratio to evaluate a company's operating cash flow.
Another ratio defining the liquidity of a company is the quick ratio.
This KPI measures the amount of current assets that can be quickly converted into cash to meet short-term financial obligations. Unlike the current ratio, which considers payments for the year, the quick ratio focuses on immediate cash.
Quick assets are the ones that can be quickly converted into cash. In other words, quick assets are current assets like inventory.
The metric also demonstrates the company's ability to generate quick cash if experiencing cash flow problems.
The gross burn rate reflects the rate at which a company uses its available cash to cover its operating expenses.
This is a common KPI among loss-generating startups. You see, as a startup founder, the foremost thing you measure is the amount of cash available to carry out daily business operations. It's a fundamental metric for small firms that do not undertake heft financial analysis.
A higher burn rate indicates a shortage of funds to cover daily expenses unless additional finance is brought into the business. Being said that, investors often consider a company's gross burn rate to decide whether to provide funding or not.
The Break-even point represents that stage of a business where the total revenue generated equals the total cost incurred.
The Break-even point is a situation of no profit or loss. Here, all your costs have been recovered in full. Whatever you earn after this point is considered as profits.
Businesses generally measure it by how many units of products they need to produce and sell to break even.
Accounts payable measures the pace at which you pay your suppliers. It basically measures a company's ability to clear out short-term debts.
This KPI is best for measuring financial stability. It measures the efficiency of financial teams and the business's reputation with its suppliers.
An increase in the AP ratio indicates you have surplus cash in hand and are paying your suppliers faster and faster.
Down the lane, this will help increase your rapport with vendors, and you may be privileged to discounts based on quick payments.
Accounts payable processing cost, popularly known as cost per invoice, measures the processing cost incurred on paying bills to suppliers.
Business finance is not just about overall revenue and profits. It's an establishment built on several bricks of minimal transactions. Thus, cost-cutting is significant whenever and wherever possible.
Generally, processing costs include bank charges, mailing costs, labor, and overheads. Since cash out-flow is something a business can’t ignore, this KPI is preferably measured on a weekly or monthly basis.
As of today, several businesses have switched to email invoices or e-billing to decrease invoice processing charges.
Accounts receivable turnover measures how efficiently a business collects payments from customers.
A book filled with credits is nothing more than interest-free loans, which you could otherwise use to expand your business. Besides, a positive AR ratio strengthens a company's operating expenses.
Days payable outstanding is a financial ratio that measures the number of days it takes for a company to pay out its suppliers.
DPO is a somewhat granular metric as it tells you exactly the time (in days) it takes for you to pay your debts. Indirectly, these insights provide a glimpse into your company's financial health.
A high DPO can be a good or bad indicator for you; it can mean:
Days sales outstanding (DSO) measures the average number of days it takes to collect payments for a sale.
Now, this metric is essential if you're lending products on credits or on an EMIs or subscription basis, requiring monthly evaluation.
Besides, given the operating expenses of a company, it's in their best interest to speed up the collection process to maintain healthy operational cash flow.
The inventory turnover ratio measures the number of times your company clears out all its inventory during a given period.
Insights driven by this KPI can help you make better pricing, production, marketing, and purchasing decisions. Generally, the higher the ratio, the better.
A lower ratio might indicate weak sales strategies or inventory pile-up. It can also mean you’re not purchasing the product that's in demand; hence, you're unable to sell it.
While inventory turnover calculates the number of times inventory was turned over, DIO measures the number of days it takes to turnover inventory, typically in a fiscal year.
This metric explicitly measures the average time it takes to sell off your inventory. As a result of this, allowing you to schedule new orders before D-day. Moreover, since you know a time frame, you can get prepared with order lists and purchase cash beforehand.
For e-commerce industries, this metric can help with better inventory management and also prevent them from receiving orders for out-of-stock items.
The cash conversion cycle measures the time a company takes to convert its inventory investment back into cash.
It's a crucial metric to evaluate the efficiency of your operational and managerial departments. The longer it takes for a company to convert its inventory into cash, the longer the money is tied up in the inventory, and neither can it be used nor counted as revenue.
Budget variance, as the name indicates, compares the project budgets to the actual budget total to identify any surplus or deficit in allocated budgets.
Budgets are set for a purpose, and that is to complete a particular task under the forecasted expense and resources.
In case, intentionally or unintentionally, there is a variation from the forecasted budget, it must be accounted for.
This metric evaluates whether the budgeted or baseline amount of expenses or revenue meets the expectations. A lower budget variance indicates that the actual expenses are lower or equal to the allocated budget. In contrast, a higher budget variance goes the other way around.
This pretty straightforward metric measures the time taken to create a company's budget.
The time taken to create a budget is idle for stakeholders or financial teams. It indicates the time taken to research, plan, and agree on a final budget. The longer the time frame, the more resources you're exhausting in terms of staffing, business hours, and brainstorming meetings.
Return on equity is a profitability ratio that measures a company's net income to its shareholder's equity.
This metric determines a company's efficiency in utilizing its shareholder's equity. A low ROE indicates that the company is not effectively using the shareholders' investments.
It also demonstrates that a shareholder can get a better ROE investing elsewhere. Therefore, a company always aims for a higher ROE to retain maximum shareholders.
This KPI measures the amount of money an investment generates to the cost of investment.
As a business owner, every investment you make must yield results. This is because you're making an investment as a company, and every investment is answerable to stakeholders and should thrive on revenue gains or business expansion.
The KPI is specific to the HR department of the organization. It measures the total no. of full-time employees involved in payroll processing to the number of employees.
Typically, organizations track this KPI to measure the efficiency and productivity of the HR department. In a scenario where the number of employees per HR specialist becomes more, the company can lay out strategies and resources to delegate workload.
Sales growth rate refers to the net change in total sales during a given period of time. It's a typical revenue metric that can gauge your sales growth over time.
Sales are a vital part of the company finance ecosystem; thus, they always aim toward growth. However, a company's sales might take a hit due to internal or external factors. Therefore, sales team managers are keen on measuring and comparing sales time after time.
Fixed assets turnover is an efficiency metric representing how well a company uses its mixed assets to generate sales.
This KPI is essential to companies that invest in PPE (property, plants, and equipment). A higher FAT indicates that the company is efficiently utilizing its fixed assets to generate more sales, while a lower FAT goes the other way around.
Return on assets is a broader concept than fixed assets turnover. The KPI measures the efficiency of a company's management to generate profits from its assets (current and fixed).
Suppose you purchase two cars each for your top executives. Although it's an asset to the company, the return on this investment doesn't feel great. That’s because a car is a depreciating asset.
Likewise, the profit you can generate from revenue collected from accounts receivables, days of sales payables, and equipment utilization – everything accounts for the overall return on assets.
The interest coverage ratio measures the ability of a company to pay off the interest on its debts.
The ‘coverage’ here stands for the time frame. Investors and lenders typically use this ratio to determine the company's uncertainty on current debts or future borrowings.
A lower ICR represents the company's inability to pay interest on loans and debts. For the most part, the company's capital strength becomes questionable if the ICR drops below 1.5.
Earning per share refers to the amount of money a company makes from each share of its stock.
You might have heard of EPS quite often; after all, it's the most quoted financial metric. Lenders, investors, and creditors often use EPS as a measurement of a company's profitability and also as a way to estimate its market valuation.
Like Return on Equity, this KPI measures how effectively a company uses investments to increase revenue and drive profits.
The debt-to-equity ratio typically measures the company's liabilities against the shareholder's equity. A ratio greater than one indicates that the company is losing investments and accumulating debt, which might worsen during downtime.
Where,
n is the number of years over which the growth occurred
The average annual growth rate, or AAGR, calculates the average annual return of an asset, investment, or any growth that is measurable.
Generally, investments and assets pay acceptable returns over many years. So, certain KPIs such as ROI, ROE, and more are not the best metrics to track long-term returns. AAGR is the best replacement as it calculates annual growth.
Lastly, a pretty simple KPI, but one that can tell you a lot about your management. Number of budget interactions measures the number of times a set budget is iterated or changed due to external or internal factors.
Frequent interactions in budgets can promote unhealthy culture in the organization. Even employees might feel distracted due to often budgetary changes for marketing, remunerations, or salary hikes.
Datapad is a mobile-friendly KPI dashboarding tool that allows data-driven leaders and finance enthusiasts to collect, analyze, and present overall financial performance via easy-to-understand dashboards.
Unlike typical desktop dashboarding platforms, our tool gets everything done on your mobile. That's right, you don't need to sit and stare at your desktop for hours.
All you need is our mobile app and a working internet connection to get all your financial data under one roof.
We tested Datapad for resolution, responsiveness, and compatibility before giving it into your safe hands, so you don’t need to worry about the UX.
Besides, our tool has much more to offer. With Datapad, you can easily:
Creating your first financial dashboard has now become easier than ever. Just scan the QR code below, and start using Datapad like a pro!
