It is critical for businesses for maintaining time-to-time monitoring of their financial health. Defining critical key performance indicators, KPI’s helps businesses for measurement of their performance and guide them in taking effective strategies that benefit with a holistic view of business operations. This article is aimed at acknowledging businesses of such metrics that can be used for assessing financial performance in critical areas of the organization in better analysis and exponential business growth. Outsourcing our efforts and expertise through OURS GLOBAL’s Financial Analysis & Reporting Outsourcing Services for 10+ years, we have helped numerous businesses to keep such indicators in mind and drive assessment of organizational performance.
KPI’s can be a critical tool for the measurement and tracking of progress in critical business areas for delivering a comprehensive report of overall business health. Compiling insights from KPIs helps businesses to be proactive management of productive changes over performance lacking areas and preventing potentially serious losses. Quantification of KPI metrics drives skillful measurement of business efforts, assuring the long-term sustainability of the operating model, and helps optimize the base business investment. Prioritizing identification and understanding of the overall impacts driven by financial realities represented by KPI metrics over businesses. The insights compiled from such metrics can drive efficient financial management that helps businesses in the identification and implementation of result-oriented practices/changes over policies, processes, personnel, or products.
Following are Fifteen Key Financial performance Indicators Influencing Your Business Value:
1.Operating Cash Flow
Comparing operating cash flow with a total capital employed as a ratio will help to get deeper insights into the overall business health, guiding capital investment decisions.
Operating Cash Flow = Operating Income (revenue – Sales cost) + (Depreciation – Taxes +/- Variation in Working Capital)
Monitoring and analyzing operating cash flow help the prompt payment of deliveries and routine operations of expenses.
Much useful for comparing total capital a business is using, they can also analyze revenue generation from a particular business operation from the support of capital investments made for the advancement of the business.
The capital that can immediately make available for their requirements is called the working capital.
Working capital = current assets – current liabilities
The difference between the existing liabilities and assets, the working capital with Cash on hand, accounts receivable, short-term investments, accounts payable, accrued expenses, and loans on the part of this equation.
This insightful KPI helps businesses to be well informed of business conditions based on available operating funds and how the available assets can suffice the short-term financial liabilities.
The ratio of current assets and current liabilities gives the solvency of an organization.
Current Ratio = Current Assets / Current Liabilities
This is a clear indication of a business’s position in meeting financial obligations and helps maintenance of credit rating for growth and expansion.
Lower indicates a higher risk of distress or default whereas a higher current ratio inefficient management of assets.
4.Debt to Equity Ratio
Debt to Equity is a ratio calculated by looking at your business’s total liabilities in contrast to your shareholders’ equity (net worth) revealing how profitable it is, ie the financial accountability of an organization.
Debt to Equity Ratio= (Short Term Debt+ Long term Debt+ Other fixed Payments) / Shareholders Equity
Indicating how well funds can be raised for profitability and growth by effective utilization of shareholder investment, the Debt to Equity ratio also reveals the accrued debt for becoming profitable.
5.LOB Revenue Vs. Target
Tracking and analyzing discrepancies Revenue for a line of business (LOB Revenue) and business projections/target reports the financial performance of each department.
Budget Variance 1 = LOB Revenue/ Target
Budget Variance helps to the easy and accurate allocation of funds for requirements.
6.LOB Expenses Vs. Budget
Comparison of actual expenses to the budgeted amount helps businesses to identify where budgeted spending went off track and enables effective budgeting in the future.
Budget Variance 2 = LOB Expenses/Budget
This budget variance KPI helps establishment of a smooth relationship between operations and finances.
7.Accounts Payable Turnover
Revealing the rate how businesses pay off suppliers.
Accounts payable turnover ratio= Average number of days due/ 365
This informative KPI indicates the duration a company takes to pay off its suppliers. An increase in ratio requires businesses to keep smooth relationships for taking advantage of time-driven discounts from vendors.
8.Accounts Receivable Turnover
Reflecting the rate of collection of customers due to payments, Accounts receivable turnover gives alerts for the requirement in the management of receivables helping to bring ideal payment collection rates within appropriate frames.
Accounts Receivable Turnover Ratio= Net Credit Sales/ Average Accounts Receivable
Assisting production and warehousing facilities, inventory turnover is the amount of turnover.
Inventory Turnover Ratio= Cost of Goods Sold/ Average Inventory
Inventory turnover KPI indicates how much of average inventory has a company has sold in a period. Thus an accurate picture of company sales strength and production efficiency.
10.Return on Equity
Measurement of business’s net income to each shareholder equity, ROE indicates the appropriateness of net income to the company’s size.
Return of Equity= Net Income/ Shareholders Equity
Informing a business’s profitability and quantifies general operational and financial management efficiency.
Improvement or higher ROI is a clear indication of shareholder investments are optimized for business growth.
The ability to utilize liquidity assets for meeting short-term financial responsibilities, Quick Ratios KPI is a clear measurement of a company’s wealth and financial flexibility.
Quick Ratio= Cash+ Accounts Recievables/Current Liabilities
This conservative evaluation of a business’s fiscal health, Quick Ratio excludes inventories from assets and is the easiest way for assessing the wealth and health of a company.
A company’s true potential for long-term success is in its customer satisfaction quantification. Calculation of the various levels of positive response that customers provide on very brief customer satisfaction surveys proves better results.
NPS or Net Promoter Services is the accurate measurement of customer retention rate across revenue base and potential for generation of referral businesses’ growth to that base.
13.Gross Profit Margin
Checking the authenticity of the price of products or goods, the Gross profit margin is the overall profit gain without including fixed operations cost.
Gross profit margin = (revenue – the cost of goods sold)/revenue
Better margins are a clear indication of better profits.
Deducting total expenses from total revenue will get the Net profit.
Net Profit= Total Revenue – Total Expenses
Synonymous with profit, Net profit is the final measure of the profitability of a company.
15.Debt Asset Ratio
Assets financed with debt, Debt Asset Ratio is the financial leverage used in the business. Higher Debt Asset Ratios indicates financial risk guiding businesses for the proper blend of shareholders’ funds and debt wisely.
Debt Asset Ratio= Total Debts/Total Assets
This critical KPI determines the credibility of business for positive impressions from investors and customers.
But Businesses must cater attention to KPI failures. Following are the reasons for KPI failures:
Inefficiencies in planning, or human error.
Minimum vetting for KPI customization
Over emphasization or under emphasization of KPI
Unclear business strategies
Thus it is critical for businesses for absolutely good or bad while considering financial KPI’s. Comparison of metrics from prior years or competitors for analyzing improvement or decline in financial performance and performance relative to others. A varied number of KPI’s helps businesses track and monitor how businesses understand how each of their actions can influence their finance and accounting operations. Our GLOBAL’s Financial Analysis & Reporting Outsourcing Services helps businesses to compile key performance metrics and guide businesses in designing effective strategies for the development of businesses. Avail of our service by contacting us by mail or call and enhance the scale and effectiveness of your investing.