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Top 20 Financial KPIs That Every Business Owner Should Keep Track

Financial KPIs for Business

Do you measure the performance of your company? How do you know if your business has achieved the goals that you set when you outlined the growth strategy?

Well, you certainly shouldn’t go with your gut feeling on this one. If you want to run a thriving business, you need to analyze every move, sale, and financial result. This can’t be executed without following the proper financial KPIs.

Financial KPIs are measurable values that show how your venture is performing when it comes to business growth, revenue and profits. No matter the size of your business, you need to be aware of your financial operations and performance.

The most systematic way to accomplish that is to set up and measure KPIs that will display all of your financial metrics. In this post, we’ll outline 20 of the most important KPIs that you should evaluate for your company.

1. Working Capital

Your working capital measures your accessible assets that meet the company’s short-range financial commitments. This includes obtainable cash, short-term investments, and receivable accounts that demonstrate how your business generates cash.

Working capital is the difference between a company’s current assets, like cash, accounts receivable (customers’ unpaid bills) and raw materials and finished goods, and current liabilities, like accounts payable.

Working Capital = Current Assets – Current Liabilities

This is the measurement of the operational effectiveness of your business. The working capital ratio (current assets/current liabilities) indicates whether your company has sufficient short-term assets to cover a short-term debt. A solid working capital has a ratio between 1.2. and 2.0. Everything below 1.0 is considered a negative working capital. A ratio of over 2.0 could mean that you aren’t maximizing your excess assets to generate maximum revenue.

2. Operating Cash Flow

Operating cash flow is the calculation of the total cash that is produced from business operations. This signals whether your company can make enough cash flow to keep operations in place or you need to ask for more funding to supplement your capital.

Operating Cash Flow (OCF) = Operating Income (revenue – cost of sales) + Depreciation – Taxes +/- Change in Working Capital

In essence, this is the cash version of your net income. The operating cash flow is focused on inflows and outflows that are connected to your central business activities, such as sales, buying office inventory, services and salaries. Your investments and other financial transactions are not considered as part of your operating cash flow because they’re noted as separate transactions, such as borrowing, buying capital and dividend payments.

3. Current Ratio

Your current ratio is a KPI that is used to evaluate your firm’s short-term liquidity. It indicates the business’s capacity to generate enough to pay any debts if they were to all come due at once. The two main parts of the current ratio are current assets and current liabilities. Your current assets are anything that can be turned into cash inside one business year (cash equivalents, accounts receivable, marketable securities, inventory, and prepaid expenses).

Current Ratio = Current Assets / Current Liabilities

Current liabilities are your debts and obligation inside one business year that can be listed on your balance sheet (short-term debts, account payables, acquired liabilities).

4. Return on Investment (ROI)

Return on investment (ROI) measures the winnings or losses created by an investment relative to the money that you invest. Your ROI usually appears as a percentage and is used to compare to your company’s profitability or the efficiency of your various investments.

ROI = (Net Profit / Cost of Investment) x 100

Because of its flexibility and simplicity as a ratio, it is one of the most used KPIs in business. The calculation is straightforward, fairly easy to explain, and has many applications. If your ROI is positive, or if other opportunities with higher ROIs are available, those can help you remove or choose the best investment options for your company.

5. Return on Equity (ROE)

Return on equity is the quantity of net income that is returned as a ratio of the shareholders’ equity. This calculates your company’s profitability by disclosing your generated profit with the money invested by shareholders.

Return on Equity = Net Income/Shareholders Equity

ROE is helpful if you want to compare the profitability of your business with your competitors. It indicates how you turn the money that is invested in your business into profits for your company, and as well for your investors. The bigger the return on equity, the more efficient your business is.

6. Return on Assets (ROA)

The return on assets indicates how profitable your company is compared to your total assets. This will give you insight into how effective your management is at generating profit. The ROA is calculated as a percentage.

ROA = Net Income / Total Assets

ROA will let you know how much you earned from your invested capital. For public companies, the ROA can be different and it depends on the niche that the business is in. The higher the ROA the better, because you make more profit with fewer investments.

7. Gross Profit Margin

This is a financial KPI that can be used to measure your firm’s financial status and business model by uncovering the amount of money that remained from revenues after the accounting process for the cost of goods that are sold (COGS) is conducted.

Gross Profit Margin = Revenue – COGS / Revenue

When you analyze the gross profit margin, you can tell if your company has created a product that is better than your competitors.

Your gross profit margin needs to be stable because, without the right gross margin, your business will not be able to cover its operational expenses.

If the gross margin can vary because of industry shifts or new pricing strategies, the regulation can be changed. If you sell a premium product for a premium price compared to competitors that sell a basic product at a normal price, you’ll have a high gross profit margin.

8. Net Profit Margin

This is the percentage of net profits to revenues for your company segments. This shows how much of the money that you’ve collected as revenue is actually profit.

Net Margin = Net Profit/Revenue

Net margins can be different, depending on the business size and industry. For example, as an individual writer you’ll have a small overhead and as a result, your paycheck will be constantly profitable. But, the annual profits and net margins of a freelance writer can seem really low compared to corporations such as Costco or Whole Foods.

The net profit margin can be one of the vital KPIs that shows how strong is your business. By following if your net margin increases or decreases, you can estimate if how you run your business works for your growth or not. You can also use your net profit to further predict profits that are based on your revenues.

9. Sales Growth

Sales growth is a metric that measures the ability of your sales team to increase revenue over a fixed period of time. This is a crucial KPI for you as a business owner because you need to make financial projections for your growth as well as towards better business decisions. You need to monitor this metric on a weekly or monthly basis to see if you have a steady growth trend or not.

As a business owner, you’ll want to know how your sales team performs, and sales growth provides you with all the data.

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10. Acid Test Ratio

Your acid test ratio is a powerful measurement if you have enough short-term assets to cover rapid liabilities. This KPI is stronger than the current ratio (working capital ratio) because it brushes aside assets that are not liquid (inventory).

Acid Test Ratio = (Cash + Accounts Receivable + Short-term Investments)/Current Liabilities

The main purpose of the acid test ratio is to get a realistic point of view about your firm’s liquid assets (cash, cash equivalents, short-term investments). If your company has an acid ratio that is less than zero, you don’t have a sufficient amount of assets to pay off current liabilities. If your acid ratio is smaller than your current ratio, it means that your current assets depend mostly on your inventory.

11. Debt-to-Equity Ratio

The debt-to-equity ratio presents the amount of equity and debt that your firm uses to finance its assets, and how much the shareholder’s equity can meet obligations to creditors if your business is in a downturn.

Debt to Equity Ratio = Total Liabilities / Total Shareholders’ equity

A lower debt-to-equity ratio indicates a lower amount of financing debt via lenders versus funding through equity via shareholders. A higher ratio indicates the company is getting more of their financing from borrowing which may pose a risk to the company if debt levels are too high.

The debt-to-equity ratio can help investors estimate if your company is highly leveraged, which may present a higher financial risk. They can compare your company’s debt-to-equity ratio against industry averages and other similar companies to gain insight into the connection between your business’s equity and liability.

12. Accounts Payable Turnover

The accounts payable turnover is a short-term liquidity percentage that can be used to measure the speed at which your company pays off suppliers.

Accounts Payable Turnover = Total Supplier Purchases / Average Accounts Payable

A declining turnover during a given period means that you need more time to pay off suppliers. If the ratio increases, you pay off suppliers at a faster rate than in prior periods. This is also a proof of your company’s financial health.

13. Day Sales Outstanding

DSO is a KPI that measures the average number of days that it takes for your company to accumulate payments after a sale has been made. You can quantify your day sales outstanding on a monthly, quarterly or annual basis.

DSO = Accounts Receivable/Total Credit Sales X Number Of Days

Higher DSO can indicate that your company sells the product to customers on credit and as a result, it takes longer for you to collect the money. This can lead to cash flow problems because of the time between the sale and the time that your company receives payment. A low DSO value means that it takes your business fewer days to collect its accounts receivable.

14. Accounts Receivable Turnover

The accounts receivable turnover is a KPI that helps you gauge the effectiveness of your business in credit extension and collecting credit debts.

Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable

If you maintain accounts receivables you indirectly extend interest-free loans to your clients because accounts receivable is money that you owe without any interest. In exceptions, a fee or interest can be levied if not paid within a certain period. Due to the time value of money principle, you’ll lose more money if it takes longer to collect money from the credit sales.

15. Inventory Turnover

The percentage that indicates how many times your business inventory is sold and replaced in a given time period. This ratio is important because the total turnover is based on two main operational elements, stock purchasing, and sales.

If you buy a bigger amount of inventory in a year, you’ll have to sell an even bigger amount of inventory to enhance the turnover. Also, your sales have to be equal to inventory purchases or else the inventory turnover will not be an effective one.

Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory

This is an excellent KPI that can help you assess how organized and efficient your business is when it comes to controlling merchandise. You can tell if you spend too much of your resources on inventory and if you can turn the inventory into profit if you sell it.

16. Budget Variance

Budget variance is a measurement that you can use to gauge the difference between allocated and actual figures for a specific accounting group. A beneficial budget variance involves positive variances or earnings. Detrimental budget variance details negative variance, which means loss and scarcity for your business.

These variances can occur as a result of regulated or unmonitored factors. You can always manage your budget and labor costs. But, you can’t control external factors outside your company such as natural disasters.

There are several reasons for budget variances, including errors, various business conditions, and unfulfilled expectations. Your budget variance can be favorable or unfavorable. A favorable variance is when you receive a higher revenue than you expected. An unfavorable variance happens when your revenue is shorted than you budgeted it in your financial forecast.

17. Budget Iterations

Your iteration budget is the budget that you can use to plan the iteration progress, based on a rough order of magnitude assessments. This is crucial for budgeting because you have to ensure that everyone involved in the budgeting process has a consent to the iteration of the budget. This consent is often formulated as “Sign Off”. This guarantees that there will be no arguments later when the budget is set.

18. Burn Rate

The burn rate shows you the rate at which you spend your venture capital as a new company to finance your overhead before you can produce positive cash flow. It is usually quantified as a cash that is spent per month.
If you’re a startup, your burn rate will let your investors know the amount of monthly cash that you spend.

There are two types of burn rate: net burn and gross burn. A gross burn is the total amount of operational costs of your business per month. Net burn is the total amount of cash that you lose each month as a result.

19. Expense Management

Expense management is a collection of systems that you can use to process, pay and monitor expenses from your employees. For this purpose, you can use software that can help you manage expense claims, authorizations, auditing, and repayment.

Expense management can help you notably reduce transaction costs and improve management control when logging, calculating and processing corporate expenses.

20. Customer Satisfaction

You can also quantify how much of your current customers are satisfied with your products/services in the form of KPI. At the end of each transaction, you can conduct a survey with each of your customers and ask them how they would rate their overall satisfaction from your product/service from a scale of 1 to 10. The ones that are closer to 10 are the satisfied ones.

Number of Satisfied Customers / Number of Satisfaction Survey Responses X 100 = % Satisfied Customers

This survey is easy to implement and when you calculate the number of satisfied clients, you’ll understand if you need to make changes in your product/service or not.

Wrapping Up

Those were the KPIs that you should not steer away from if you want to monitor your business development process. Some of the metrics above can be more informative to you than the others but, that doesn’t mean that you should neglect the other ones. If you don’t calculate each of the KPIs that are mentioned, you won’t be able to interpret the data correctly, and that can harm your company.

Bottom line, use the metrics above to monitor and assess the condition of your business. If you spot any problems, resolve them in a proactive manner before it seriously damages your budget and business growth.

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