Working capital management determines if your business is profitable and sustainable. We list down the ways to compute and how you can maintain a...
10 Important KPIs to Measure the Financial Health of Your Business
How will you know if your business is performing well? We list essential finance and accounting KPIs to help your business achieve its goals.
"You cannot improve what you do not measure" should be a mantra for all businesses.
Setting up key performance indicators (KPIs) is a must to read your company's health accurately. These indicators measure your profitability, liquidity, efficiency, and valuation.
Every business owner, CFO, and accounting manager should have KPIs to ensure that financial objectives are met, give insights into your company's financial performance, and help you make goal-oriented decisions.
Finance KPIs You Should Monitor
Here are some finance KPIs you can use to measure your specific goals.
1. Net Profit Margin
The net profit margin is one of the most common KPIs since it accounts for all expenses. The figure, expressed in percentage, measures how well your company can turn every dollar of revenue into profits. It can give you an idea of how to stay competitive in pricing your products and the profitability of your business.
Know your KPI by dividing your net income by your total revenue and multiplying it by 100.
|Net Profit Margin =||Net Income||x 100|
2. Operating Expense Ratio (OER)
This indicator is an excellent addition to your company's spend analytics. The OER measures your company's efficiency with your operating expenses. Investors look at this to provide insights into your business' scalability.
Compute your OER by getting the total operating expenses and dividing them by your gross revenue.
|Operating Expense Ratio =||Total Operating Expense|
3. Working Capital
This accounting KPI is a liquidity measure that shows how much cash is readily available in your business. It is also your company’s ability to pay off short-term liabilities due within 12 months. A low working capital indicates financial instability, while a high one may suggest that assets are not maximised.
You may determine your working capital by subtracting the current liabilities from the current assets.
|Working Capital =||Current Liabilities – Current Assets|
4. Selling, General, and Administrative (SG&A) Ratio
The SG&A Ratio is an efficiency metric that shows the percentage of sales revenue covering a broad range of operational costs such as rent, advertising and marketing, supplies, and overhead costs. A lower SG&A ratio would mean higher profitability for your business.
While it is common to think that having a consistent profitability ratio is good for your company, this is not always the case. Depending on your company’s goals, it can also mean a plateau in growth or a missed opportunity to innovate. It is crucial to determine a ratio that reflects your company objectives.
You may determine your SG&A ratio by adding all operational expenses and dividing the sum by your net sales revenue.
|SG&A Ratio =||Total Operational Expense|
|Net Sales Revenue|
5. Current Ratio
This KPI is similar to working capital, but presented as a ratio. It accounts for all assets and liabilities to show how well you can meet your financial obligations within 12 months, and conveying your operating cycle's efficiency in a given period. A healthy current ratio to target is between 1.5 and 3.
Compute your current ratio by dividing the current assets by the current liabilities.
|Current Ratio =||Current Assets|
6. Inventory Turnover
The inventory turnover KPI measures the ratio of your inventory sold versus the entire in-stock inventory in a given period. This figure shows how efficiently you sell your inventory and generate sales. A low ratio means overstocking or weak sales, while a high ratio suggests strong sales or less inventory.
You can get this figure by dividing the cost of goods sold (COGS) by the average inventory balance for the period.
|Inventory Turnover =||Cost of Goods Sold|
|Average Inventory Balance|
7. Accounts Payable Turnover
Accounts payable is one of the most common business expenses, and monitoring it is crucial in determining your efficiency in paying your vendors. The accounts payable turnover metric is a great way to measure the speed at which you pay your suppliers in a given period. High ratios indicate a faster payment speed, while lower ratios may indicate your inability to pay your dues on time.
You need to divide the total purchases from your suppliers by your average AP balance within a defined period to get this figure.
8. Accounts Receivable Turnover
This accounting KPI measures how fast your company collects cash from credit sales and the quality of your credit policies within a given period. A high ratio means your business is liquid and can quickly convert credit sales to cash. A low ratio shows slow payment collection, which indicates the need for credit policy revisions.
You'll need to divide the total net value of your credit sales by the average AR balance within a given period.
9. Budget Variance
The budget variance is a crucial financial KPI that compares your actual figures to the budgeted ones. This KPI shows the accuracy of your budget projections with your actuals, and it is crucial to spot high variances resulting from this computation. Pay attention to values above 10%.
Get the difference between the actual and budgeted amounts. Divide it by the budgeted amount, then multiply by 100 to get the percentage.
|Budget Variance Percentage =||Actual Budget - Projected Budget||x 100|
10. Payroll Headcount Ratio
This metric shows the productivity of your HR team by identifying the number employees supported by each HR or payroll specialist. Using this formula avoids overhiring.
Compute by dividing the total full-time HR headcount by the total number of people on the payroll.
|Payroll Headcount Ratio =||Full-time HR Employees|
|Total Employees on Payroll|
Track Your Goals
When it comes to your business strategy, Creating SMART goals is only the first step. You must also measure how well your company meets those goals and align them with your decision-making. Using the right finance KPIs will surely guide you to the best possible course of action.
Consider using Spenmo if you're looking to speed up and streamline your accounting processes! It is a cloud-based payables solution that automates all your payments while consolidating all of your corporate spending data in one dashboard.
Visit spenmo.com to book a demo today!