Finance key performance indicators are essential to keep track of to properly gauge the success of your business. While it may seem like your business is running smoothly, financial performance indicators will provide you with concrete facts and figures about just how well your business is performing and a solid understanding of the financial health of your organization.
There are many key performance indicators you can measure to ensure your business is financially stable and performing as well as it could be. So, which are the best KPIs for finance managers to measure to determine the long-term success of your business?
Finance key performance indicators provide insights into business performance.
Measuring the right financial performance indicators will allow you to fully understand how well you’re meeting your goals and how successful your business truly is. KPIs measure several things for business including:
Since no business can stay operational without profits, measuring your net profits, or your bottom line, allows you to understand how much money you have in your business after all bills have been paid. To determine your net profits, the simple equation of subtracting your total expenses from your total revenue will allow you to determine how your bottom line is performing. Financial indicators, like determining your net profits, will make it easier to stay operational during seasonal fluctuations.
This financial performance indicator helps you understand how well your organization can pay its bills. By dividing your current assets by your current liabilities, you can easily understand your current ratio and this number should, ideally, fall between 1.5 and 3. If you discover that your current ratio falls under 1.5 or even 1, this means that your business does not have enough money to pay your bills and could result in business failure.
Gross Profit Margin
One of the most important financial KPIs for small businesses is gross profit margin. This KPI lets your small business understand if you’re pricing your goods or services appropriately and you can determine this by first calculating the cost of goods you sell subtracted from your revenue. Then, take that figure and divide it by your revenue. This will let you know if your profit margin is large enough to cover your operating expenses while leaving you with profits at the end of the day. For your small business to remain operational, it’s essential to determine if you’re pricing your commodities properly.
Net Profit Margin
Finance key performance indicators, like your net profit margin, allow you to understand what percentage of your revenue was profit. By dividing your net profits by your total revenue, you can determine how much profit your business is making, project future profits, and even set realistic goals and benchmarks for profitability.
Aging Accounts Receivable
Many businesses operate by opening accounts for customers and sending them bills. One of the most crucial key performance indicators for the banking industry is aging accounts receivable. This KPI can be very eye-opening and allow you to understand the root cause of your cash flow problems. If you find that some customers take much longer than others to settle their accounts, this can give you a good reason to start charging higher interest on overdue accounts or drop these clients altogether.
An efficient accounts payable process allows your organization to manage working capital and cash flow much better, maintain strong vendor relationships, increase organizational agility, and even determine areas of cost savings. This KPI is essential for finance managers to measure because it could not only save your business money and help cash flow but will also make it easier to comply with regulatory practices.
Before you determine the best finance key performance indicators for your business, make sure you choose ones that are realistic, they’re clearly communicated with all employees throughout your organization, and you only choose ones that pertain to your business. Having too many financial indicators will take away focus from important KPIs and other activities that are essential to the success of your business. Key performance indicators provide essential data into business performance and are necessary to stay successful.
With the right finance key performance indicators in place, you can be certain of the success of your business.