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The Best Financial Metrics and KPIs You Should Try

created on 20 May 24 Sunday 19:32
1. Acid Test / Quick Ratio
2. Operating Cash Flow (OCF)
3. Burn Rate
4. Current Ratio
5. Gross Profit Margin
6. Net Profit Margin
7. Current Accounts Receivable
8. Working Capital
9. Accounts Payable Turnover
10. Current Accounts Payable
11. Accounts Receivable Turnover
12. Accounts Payable Process Cost
13. Budget Creation Cycle Time
14. Payroll Headcount Ratio
15. Number of Budget Iterations
16. Budget Variance
17. Inventory Turnover
18. Debt to Equity Ratio
19. Resource Utilization
20. Return on Equity
21. Internal Audit Cycle Time
22. Sales Growth
23. Payment Error Rate
24. Vendor Expenses
25. Days Sales Outstanding
26. Line Items in Budget
27. Finance Error Report
28. Total Cost of the Finance Function
29. Cost of Managing Processes
Conclusion

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Financial metrics and KPIs are essential parameters for evaluating the productivity of a firm. Financial KPIs have gained a lot of attention in both the private and public corporate institutions which are operating in this 21 st century. Financial Key Performance Indicator refers to a value which is measurable and that denotes the overall dashboard scores of the company in regards to profit and revenue generation. Keeping track of the KPIs indicates if the business corporation is realizing its set long- term objectives. Irrespective of the company age and the size, every business has to prioritize timely evaluation of its financial performance. Let us now consider the top 29 financial KPIs which you should integrate in your business company.

1. Acid Test / Quick Ratio

The quick ratio shows if a business has accumulated adequate short- term assets to offset its future occurrence of liabilities. Acid test grants a, more perfect wider overview of the financial health of a company than the current ratio as it doesn’t incorporate liquid assets like inventories. Let’s consider the model that illustrates how quick ratio is displayed in an equation.

debt to equity ratio

2. Operating Cash Flow (OCF)

Operating Cash Flow (OCF) indicates the cumulative amount of money that are generated by daily business operations of the company. Thus the financial metric (OCF) greatly aids the company in knowing whether it can manage to maintain a consistent cash flow required for its growth and expansion. In a situation whereby a company cannot manage to maintain its cash flow as indicated by the operating cash flow findings, then it can resort to externally source finances so as to meet its expenses.

Therefore, to calculate the cash operating flow, you adjust net income for items such as changes in the inventory catalogue as well changes to receivable accounts. In the process of analyzing your OCF, you ought to compare it to the sum total capital allocated to analyse whether your business generate sufficient capital to maintain the positivity of the accounts.

3. Burn Rate

This is a model of KPI that indicates the frequency at which a company is using its disposable finances on ether annual, weekly or on monthly basis. The metric in question (Burn Rate) can greatly benefit small and medium business firms that do not execute comprehensive financial analysis. In comparison with the revenue and the net profit margin, the Burn Rate reveals if the operating costs of an organization can be sustained in the long- run. Therefore, varied sized business companies can uphold Burn Rate KPI in their financial analysis so as to identify their manageable expenses on weekly, monthly or on annual bases.

4. Current Ratio

Current Ratio KPI indicates the ability of an organization to settle all its financial obligations annually. This financial KPI incorporates the current assets of a company for instance, account receivables and the current liabilities like account payables. In the evaluation of the Current Ratio of your business, a Current Ratio which is less than one shows that your business company will not afford to settle all its yearly financial obligations. This calls for your business company to externally source finances so as to meet the annual financial obligations of your business company.

5. Gross Profit Margin

The Gross Profit Margin account for the proportion of funds which remain from the income revenue after executing an accountability of  the cost of products sold. This kind of financial metric is a powerful measure of the financial health of a company. This is because it indicates if a business company is able to fully settle its operating expenses while having some money left for its growth and expansion. In that connection, a large percentage of the business organizations do possess a relatively stable figure of Gross Profit Margin.

However, there are some business organizations which might be characterized with an unstable figure of Gross Profit Margin because they might have executed some radical changes affecting adversely the cost of production. For instance, some of the business companies might execute extreme changes in the policies regarding the pricing of its goods and services to its potential customers, thus affecting its cost of production.

6. Net Profit Margin

Net Profit Margin is an essential financial index that indicates how efficient a company is in the context of profit generation in comparison with its revenue. Net Profit Margin is computed as a percentage profit of the generated revenue. This financial metric reveals the amount of each dollar generated by an organization that is transcribed into profits. Net Profit Margin metric gives a reflection on profitability of an organization and denotes how fast the business can realize growth and expansion in the long- term basis. Therefore, Net Profit Margin can be expressed as shown below;

Net Profit Margin= Net Profit/ Revenue

7. Current Accounts Receivable

Current Account Receivables is a key financial metric that measures the cumulative amount of funds which debtors owes to the business company. This KPI aids your company in estimating the upcoming income and thus compute the days of average debtor thus showing the period it takes an average client or a business partner to honor their debts. Thus, a high figure of Current Account Receivable Metric indicates that a business company in question is not capable to deal with debtors who are long- term and hence losing money. The individual clients as well as the companies who don’t settle their payment of debts are considered to be defaulters.

8. Working Capital

The Working Capital metric compute an organization’s assets which are available currently to settle short- term financial commitments. Working Capital demonstrates the liquidity of the business and it include assets such as accounts receivable, short- term investments, as well as the available cash. Working capital for your business is cash that is available immediately. Therefore, you ought to analyse the financial health of your company by computing the available assets for meeting short- term liabilities. Working Capital is computed by deducting current liabilities (Current financial obligations) from the current assets which are the resources which exhibit cash value. Thus, Working Capital is computed as shown below;

Working Capital = Current Assets – Current Liabilities

9. Accounts Payable Turnover

The Accounts Payable Turnover is basically a financial metric that that shows the rate that a business company pays its average amount of money that is payable to the creditors such as banks, suppliers among other creditors. Here in an illustration that will acquaint you with skills on how to compute Accounts Turn Over for your business firm. Let’s say for example your Business Company makes $20 million value of purchases supplied to it by its supplier in a month, and at any given point it has the remaining Account Payable equivalent to $5 million. This implies that the Account Payable Turnover for your business is equivalent to $20 million/$5 million= 4.

If the above computed turnover ratio is declining in comparison to the previous periods, then it would show that your business is having challenges in settling its debts. On the other hand, if the above computed turnover ratio is higher compared to the previous periods, then it will imply that your business company is honoring the debts from your supplier(s) at a faster rate than previously.

10. Current Accounts Payable

The Current Accounts Payable is a metric which is opposite to the receivables in that it shows the cumulative amount of debts that a business owes to the creditors, banks, and suppliers. It is mostly broken down into business departments, projects and business divisions so as to obtain a more conceptualized overview of current payables. Now, to compute the Current Accounts Payable, your business organizations needs to factor in all the liabilities that need to be settled at a given time frame. Therefore, your business organization has to adhere to the key fundamentals of Current Accounts Payable so as to keep your books of account at a positive state.

11. Accounts Receivable Turnover

This metric, Accounts Receivables Turnover indicates the efficiency and effectiveness of a firm in extending credits and collecting its debts. Therefore, if your company maintains an extensive opened bill for your customer, then it will be like offering an interest- free loan instead of utilizing the money in growing and expanding your business.

To compute the Accounts Receivable Turnover, you need to divide the net value of the sales made on credit at a given time frame by the average account receivable during the same time frame. Thus Account Payable Turnover is given by;

Account Payable Turnover= Net Value of Credit Sales/Average Account Receivable

Thus, the lower the figure obtained from the computed Accounts Receivable Turnover indicates that your business is struggling with the collection of payments and debts. Thus, if your business is encountering such struggles, then you need to have more assets which are ready to be invested in the innovation and growth of your business.

12. Accounts Payable Process Cost

The Account Payable Process Cost is a key KPI in indicating the sum total expenditure in the processing of invoices all the payments in a given period. The findings from an APQC’s Survey conducted on the productivity of Accounts Payable Process Cost indicate that there is a need for businesses to invest in electronic invoice processing since its cost is low. Additionally, the electronic platform of invoice presenting, processing and payment saves time and money and thus will enable your business to grow and expand.

13. Budget Creation Cycle Time

The Budget Creation Cycle Time is a financial metric shows the time frame utilized in researching, planning and agreeing on the viable company’s budget. A lengthy creation cycle is not totally bad but it might end up utilizing extreme valuable resources such as the leadership’s time resource.

14. Payroll Headcount Ratio

This financial KPI indicates the number of team members who are involved in the processing of payroll in comparison to the overall number of employees in your company. The Payroll Headcount Ratio shows the numeric of workers in a company that is supported per every dedicated full- time staff. In order for your company to compute the Payroll Headcount Ratio, it has to establish the ratio of HR full- time positions to the total number of workers. This concept of Payroll Headcount Ratio is illustrated below;

kpi financial institutions

15. Number of Budget Iterations

This metric, Number of Budget Iterations indicates that the more the number of budget iterations, the longer it takes to plan and approve the budget for your business. The number of varied versions of a budget produced prior to the final approval greatly depends on the ability of the management to plan accurately and efficiently the budget of the next term.

16. Budget Variance

Budget Variance is a project management KPI which is used frequently and it showing the variation of projected budgets in relation to actual budget totals. Thus, a small magnitude of the variation in budgets shows that the actual expenses are lower than or equals to the projected budgets or the volume of revenue is more than the anticipated one. Budget variations are normally caused by either inappropriate management decisions or forecasting which is too optimistic.

17. Inventory Turnover

The Inventory Turnover is an essential KPI that shows that degree of efficiency with which your business company sells and replaces its inventories at a given time. Thus, the Inventory Turnover reveals your company’s capability to make sales and instantly re- stock its products. Below are the two formulas for computing the Inventory Turnover;

  • Inventory Turnover = Cost of Goods Sold / Average Inventory
  • Inventory Turnover = Sales / Inventory

18. Debt to Equity Ratio

This financial metric, Debt to Equity Ratio is closely similar to the Return on Equity Ratio in that it shows how efficiently and effectively a business company is putting into use the investments of their shareholders. Thus, a high figure of Debt to Equity Ratio shows that a business company is massively losing investments and building debt instead of generating revenue from the invested capital.

19. Resource Utilization

For most business companies, the time devoted for work by the employees is the most precious asset which they bill for their clients. This philosophical approach apply for the law firms, creative agencies, among other business models which are based on employee services. Thus, the Resource Utilization metric shows the degree of effectiveness with which a company utilizes its time resource in regards to billable time versus non- billable time.

20. Return on Equity

This financial metric, Return on Equity, shows the capability of your business to effectively put into use the investments of the shareholders. Therefore, Return on Equity metric reveals the amount of revenue which a company is able to generate for each unit of the equity of a shareholder.

21. Internal Audit Cycle Time

The financial metric of Internal Audit Cycle Time indicates the average time needed to execute a complete internal audit. This KPI, Internal Audit Cycle Time considers majorly the stakeholders as well as the leadership of the company that requires an overview of the payments, budgets as well as the expenses of the company.

22. Sales Growth

This financial KPI, Sales Growth, indicates the variation in the generated total sales over a given time frame. Therefore, the financial metric of Sales Growth indicates the percentage of the latest sales period in comparison to the previous sales period, showing either decrease in accumulative sales or a positive growth rate.

23. Payment Error Rate

The financial KPI of Payment Error Rate discloses the percentage of the outgoing or the incoming payments that were not finalized due to error in processing . More often , the major reasons behind payment processing errors include; poor documentation, lack of approval or a missing reference among other errors.

24. Vendor Expenses

The Vendor Expenses is a financial metric that indicates the latest payments a business is due to its vendors. A vendor refers to anybody or any corporation that provides products and services to individuals or to business companies. Therefore, relatively high vendor costs could indicate that the company in question is encountering troubles paying its suppliers and its vendor on a timely basis.

25. Days Sales Outstanding

The financial metric of Days Sales Outstanding discloses the average period of time needed for the customers to pay a business from the receipt of the invoice till the complete payment. Therefore, a lower figure of Days Sales Outstanding, the more a business can concentrate on expanding and placing orders of more supplies.

26. Line Items in Budget

The Line Items in Budget is a financial metric that greatly aids project leaders and managers to always track the business expenditures in more effective and in a detailed manner. In a greater extend, the line items indicate business departments, projects as well as other accounting measures which grant an improved overview of the way the money is put into use. Additionally, a budget which is detailed gives an easy time for your business to focus on the relevant projects and departments when there is a need for cost cutting.

27. Finance Error Report

The Financial Error Report is a financial KPI that shows the financial reports that need extensive justifications. Also, this financial metric, Financial Error Report indicates the financial reports that entail errors and thus demanding a review and a more comprehensive financial investigation.

28. Total Cost of the Finance Function

This financial metric, Total Cost of the Finance Function discloses the ratio of the cumulative cost of the financial production activities in comparison with the cumulative revenue of your company. Examples of an organization’s financial expenses include but are not limited to; costs of managing business systems, personal management cost, overhead costs among other compulsory expenses needed for the daily operations of a business organization. 

29. Cost of Managing Processes

Cost of Managing Processes is an essential financial metric that can be closely monitored by a department of a business so as to evaluate the expenditure of managing the work of the employees as it plans for the future. The lower the expenditure of managing processes, the more assets are set aside for task- implementation and the expanding of the business. Thus, it’s essential for your business to incorporate effective and efficient models in managing its day to day operations so as to minimize on its overall operational costs. If your business company manages the entire production processes effectively, then it will realize massive growth and expansion thus acquiring comparative advantages in the corporate markets.

Moreover, Financial KPIs enable your business company to predict future risks such as extreme loses. In the current era characterized with technological advancements, every business has to follow the guidelines of the discussed 29 financial metrics so as to remain very competitive in the global market. Since the core objective of every business organization is revenue generation, then it has to adhere the financial metrics which extensively dwell on the proper financial management schemes. The financial metrics are the key driving factors that have seen several organizations acquire financial growth and development. The secret behind most of the business organizations that have attractive rates for the employees is

The Significance of Financial KPI

financial kpi analysis

Financial KPIs evaluate the success of a company versus the set objectives, targets or the short time as well as the long term goals of a company. This fundamental aspect of KPI is key in providing the roadmap for your business company. Additionally, Financial Key Performance Indicators, KPIs, are beneficial to the running and sustenance of a business organization. This is because, the elaborated KPIs in this article evaluate the rate of employee retention, the measure of food traffic mostly in the business store as well as the rating of customer experience with your business company among other business parameters. The secret held by most of the business organizations which have very competitive remuneration packages for its employees is the adherence to the use of Financial KPIs in their operations.

Conclusion

financial kpi analysis

The extensively discussed Financial KPIs are crucial parameters for the health of every business organization, both privately as well as publicly owned organizations. The success of every organization in this era of extreme competition depends on its adaptability of the various financial metrics which have been comprehensively addressed in this article.



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