All businesses need to identify their most important metrics and report on them consistently. After all, what gets measured, gets managed.
You will undoubtedly have some KPIs that are relevant to your particular industry, or even your own company. But there are some financial KPIs that you should always be tracking and analysing.
Here is a look at some of those metrics, along with the five reasons why financial KPIs are key for businesses.
1. Monitor Company Health
Tracking financial KPIs helps you monitor the health of your company. You need to measure the areas that contribute most to your overall business performance. In this way, you can be sure that the business is aligned properly so that it can be successful.
Most financial KPIs that demonstrate company health fall into the areas of your profitability, liquidity, efficiency, company value and financial leverage.
Measuring your working capital and cash flow, for example, lets you know if you have the money available to pay your creditors and staff, and whether you have the capital to invest in the business and fund future projects.
By continually measuring profit and loss indicators like net profit and operating income, you get an up-to-date picture of financial health and can always see if you are breaking even or overextending yourself.
Some other vital financial KPIs you might want to report on to gauge your company health include:
- profit margins – both gross and net
- sales growth
- current ratio and quick ratio
- accounts receivable turnover
- earnings per share and price to earnings ratio
- debt to equity ratio and return on equity
2. Reveal Patterns and Trends
Tracking your financial KPIs over time may reveal patterns and trends. Through your analysis of how much a KPI is changing over time, you might spot something that you were previously unaware of. This can be a valuable tool to identify both issues and opportunities for your business.
Using a rolling percentage change in your numbers, you get a different perspective that might reveal a pattern.
For instance, you might notice a seasonal effect behind a drop in revenue, or your metrics might provide additional context around why you are not reaching your profit margins.
And if your analysis shows that debtor days are trending upwards, then this might prompt a change in strategy or a need to drill down into other metrics. Or perhaps you see that profit margins are shrinking, so you may want to renegotiate costs with your suppliers or raise your own prices.
You might recognise trends that show which industries are on the up – or down – for you. And service providers can see changes in consultant productivity and client profitability.
3. Measure Progress Towards Goals
Most businesses run annual budgets, split down into quarters and months. By measuring your financial KPIs, you can see how the business is performing against its targets on an ongoing basis. You can see if you are behind and what you need to achieve in order to catch up.
Obviously, you should measure the financial KPIs that match your business priorities, so that you are assessing the metrics that reflect what it is that your business depends on to be successful. Aside from a standard set of KPIs, you may want to focus on different areas periodically. For example, if your growth is currently dependent on customer acquisition, you may also want to delve into other, non-financial KPIs, like customer lifetime value, customer profitability, churn rates, and so on.
Having measurable goals and assessing your progress towards them gives your business – and staff – drive and focus. Plus, it makes everyone more accountable. Without knowing where you currently are, you will never be able to get to where you are going. But measuring your progress will provide a clear route.
4. Indicate if Goal Adjustments are Required
In evaluating your KPIs and your performance, you can see if you are either failing to meet your goals or are over-achieving them. This then allows you to make any necessary adjustments.
If your KPIs show that debtor days are being met by a good margin, it may be that you can reduce your target even more. Or, if your burn rate is high compared with your growth, meaning you are not so attractive to potential investors, you may want to sharpen your growth objectives.
And by examining KPIs that give an idea of future financial performance – what are termed leading indicators – you can highlight areas where you might need to tweak your goals.
5. Uncover Trouble Spots
KPIs can uncover any trouble spots by flagging up warning signs. If your metrics look worrying, then remedial action can be taken.
The quick ratio – also known as the acid test – is a liquidity KPI that measures how well a company can meet its short-term obligations. By including only assets that can be quickly turned into cash, it assesses how liquid – and therefore how healthy – a company is. If the quick ratio is too low, or trending downwards, it is an indicator that you will struggle with meeting your liabilities. A company that has difficulty paying its debts can quickly founder.
By measuring this and other KPIs, you can see if your business is on track and can also be alerted to any warning signs that might herald trouble.
Measuring KPIs with NetSuite
NetSuite ERP comes with more than 75 pre-prepared KPIs – plus you can also create your own custom indicators. These are calculated and displayed automatically on your dashboard, eliminating the need to spend time trawling through figures or manually creating and running reports. Instead, your company’s management and finance teams have ready access to all the important KPIs, allowing you to monitor company health, measure progress, spot trends, adjust targets and uncover any issues. For more information on NetSuite, contact us today.