Key performance indicators (KPIs) help cut through the noise so that an organization’s decision-makers can develop future-forward business strategies based on facts.

Financial KPIs are used to measure, track and analyze progress toward departmental or company-wide goals.

There are many financial KPIs; far too many for a small or mid-sized business to adopt them all. That’s why each company needs to select the ones that best fit its strategy.

What are Financial KPIs?

Everyone wants insights and that’s why KPIs matter; the right combination of financial metrics allows you to accurately evaluate financial, strategic and operational successes and challenges. With your financial KPIs in hand, you can develop solutions and implement changes to correct issues and create new strategies to help your organization reach its goals. Sometimes you can even compare your KPI financial metrics to your competitors—and what organization doesn’t want competitive insights?

Creating Manageable Financial KPI Categories for the Data Decade

Financial reporting is a complex area, covering expenses, profits, revenue and multiple other financial outcomes and there’s a significant amount of data for each.

Financial KPIs should be broken down into smaller categories because it makes it easier to manage your data and get targeted insights. When you’re selecting your organization’s financial KPIs, consider grouping them into categories like this:

• Liquidity KPIs track how much cash is readily available to your business.
• Profitability KPIs focus on how much money is left for your business after paying expenses.
• Gross Margin KPIs calculate how much profit your company makes on each dollar of sales before expenses.
• Sales Growth KPIs measure the ability of your sales team to boost revenue during a fixed period.
• Employee Value Added KPIs track what the average employee adds to your organization’s bottom line.
• Efficiency KPIs are more specialized, but they are often helpful for monitoring operations to ensure lean costs, improved efficiencies and strong returns.
• Valuation KPIs are often more complex and focus on strategic goals, but they are useful for demonstrating how well your business is achieving key objectives, such as a ratio of price to earnings or earnings per share.

Financial Metrics: The Top 10 KPIs

Let’s explore some of the most commonly used 10 KPIs for financial reporting and why they’re so important for your business.

1. Sales Growth

Sales growth is one of the most crucial revenue KPIs for any company. Your sales growth reveals the change in net sales from one period to the next, expressed as a percentage.

Sales growth rate = (Current net sales – Prior period net sales) / Prior period net sales × 100

You need to know if your sales are growing or contracting.

Sales growth is one of the most powerful metrics for any organization because it’s directly tied to revenue and profitability. This is a core tool used to measure the overall health of your organization. Check in on your sales growth anytime you want to get a better reading of how your sales are going.

2. Gross Profit Margin

The gross profit margin KPI is a vital metric for the profitability and efficiency of an organization’s core business competencies.

Gross profit margin = (Net sales – Cost of goods sold (COGS)) / Net sales × 100%

Financial analysts find it simpler to work with profit represented as a percentage of revenue because it’s easier to evaluate profitability trends over a period. It also makes it easier to compare your figures with your competitors’. Gross profit margin is a profitability KPI.

The best time to include gross profit margin as a KPI is when you need to determine where you should reduce or highlight specific products and services that might not be as profitable as originally anticipated.

 

3. Accounts Payable Turnover

The accounts payable (AP) turnover KPI represents a percentage of the total number of invoices processed from the point and time of receipt until each one is ready to be posted into the accounting system.

Accounts payable turnover = Net Credit Purchases / Average accounts payable balance for period

The AP turnover KPI is crucial because it reveals how an organization manages its cash flow. If you have a higher ratio, that means you pay your bills faster. Accounts payable turnover is a liquidity KPI.

If you’re concerned about repaying any payables, having AP as a KPI can restore your confidence or let you know if you need to redirect by adjusting your financial model to create a higher scoring number. If your AP turnover KPI results in a low number, you might want to determine how you can pay off obligations more frequently.

4. Accounts Receivable Turnover

The accounts receivable (AR) metric shows how quickly and effectively companies collect money owed from customers on time.

Accounts receivable turnover = Sales on account / Average accounts receivable balance for period

The AR turnover KPI tells you the number of times the average AR balance becomes cash in your account during a certain period (often a year).

With this KPI, you can monitor the rate at which you collect money that’s owed to your business. You want a relatively high AR turnover because that means your cash flow is healthy. However, don’t get excited if your turnover is too high. A high AR turnover can sometimes indicate that a business is overly aggressive in collections strategies and practices. If customers discover this practice, it might put them off your brand, no matter how diligently and timely they plan to pay. Accounts receivable turnover is a liquidity KPI.

If you’re making consistent sales but wonder why your cash flow remains low, you might need to conduct an accounts receivable turnover measurement to determine whether too many customers are paying you with credit that goes unpaid.

 

5. Accounts Payable Turnover

The accounts payable (AP) turnover KPI represents a percentage of the total number of invoices processed from the point and time of receipt until each one is ready to be posted into the accounting system.

Accounts payable turnover = Net Credit Purchases / Average accounts payable balance for period

The AP turnover KPI is crucial because it reveals how an organization manages its cash flow. If you have a higher ratio, that means you pay your bills faster. Accounts payable turnover is a liquidity KPI.

If you’re concerned about repaying any payables, having AP as a KPI can restore your confidence or let you know if you need to redirect by adjusting your financial model to create a higher scoring number. If your AP turnover KPI results in a low number, you might want to determine how you can pay off obligations more frequently.

6. Working Capital

The working capital metric gauges your business’s financial health by looking at the readily available assets that you could use to manage any short-term financial liabilities, like loan debts.

Assets included in this KPI are:

• Cash on-hand
• Short-term investments
• AR to demonstrate liquidity or the ability to generate cash quickly

Working capital = Current assets – Current liabilities

The working capital KPI helps you assess how much capital you have to take care of short-term expenditures.

There’s a downside to having too much working capital because it could mean that you might not be getting the most out of your assets. You need to find the right investment balance for long-term returns. It’s a balancing act ensuring that you maintain a positive available cashflow without losing out on investment opportunities—monitoring your working capital helps you find the sweet spot. Working capital is a liquidity KPI.

As your business grows, it tends to become more complex. The best time to measure working capital is when you want to become better equipped to handle business changes more quickly and ensure that your cash conversion cycle is running smoothly.

7. Current Ratio

The current ratio shows your company’s short-term liquidity. Current assets are anything that your business can convert into cash within a year. These assets include AR, cash and inventory. Current liabilities include any debt owed within a single year, such as your AP debts.

Current ratio = Current assets / Current liabilities

The current ratio KPI fires up red flags if your company is at risk of not having enough available assets to manage any short-term financial obligations that come up. Current ratio is a liquidity KPI.

Including current ratio as a KPI is most helpful if you need to prove your company’s liquidity to creditors or investors to take on a new project, buy new equipment or hire more employees.

8. Quick Ratio

A quick ratio KPI reveals the state of your company’s short-term liquidity, only looking at your most liquid assets. This means that you do not include your inventory as part of your liquid assets in the formula.

Quick ratio = Quick assets / Current liabilities

The quick ratio KPI measures your organization’s ability to meet short-term financial obligations with your business’s available assets that can be instantly turned into cash.

Quick ratio KPI is a more conservative evaluation of your fiscal health than current ratio because it doesn’t include your inventory as part of your assets. Quick ratio is a liquidity KPI.

Anytime you want to reassure your investors, lenders or suppliers—whether by their request or your initiation—that you have plenty of cash on hand to pay current, short-term liabilities, monitoring your quick ratio gives you the ideal KPI to have on hand.

9. Inventory Turnover

Want to know how often inventory is bought, sold, or replaced within a specific timeframe? Then you need to monitor your inventory turnover KPI.

Inventory turnover = Cost of goods sold (COGS) / Average inventory balance for period

Knowing your inventory turnover can help you make better decisions regarding manufacturing, pricing, marketing, reordering, and purchasing new inventory. It reveals how well your processes are working and resulting in sales that lead to making more informed future decisions. Inventory turnover is a valuation KPI.

If you want to stay in touch with how well your stock is turning over to determine your cash flow, this KPI is crucial to monitor. If your stock sits dormant in your warehouse for too long, it also ties up your cash flow. Ultimately, including inventory turnover as a KPI lets you know how your inventory is performing and whether you might need to make some changes.

If you need to make new purchases, total asset turnover is a vital KPI to help in your decision-making. The calculation lets you see all your assets, such as equipment, real estate, cash, furniture, vehicles, and receivables. With this information, you can determine if you want to use them to fund your company’s operations and generate even more revenue.

10. Budget Variance

Budget variance compares your business’s actual performance against projected budgets or financial forecasts. You can apply this KPI to any variance you choose to analyze, such as expenses, revenue or profitability.

Budget variance = (Actual result – Budgeted amount) / Budgeted amount × 100

Budget variance lets you compare anticipated budgets and expectations against your business’s actual performance.

If something is amiss, and you discover an unfavorable budget variance, this valuation KPI lets you get to the bottom of things faster to make corrections. This KPI helps with solid planning and helps you correct the course if anything doesn’t match your expectations. Budget variance is a valuation KPI.

Frequently used in project management, budget variance is useful for detecting and understanding any budgetary anomalies, such as being lower to anticipated budgets.

 

Simplify KPI Metrics Monitoring

Financial KPIs are critical to track, but many organizations struggle to do so. Think about how challenging it is: working with your current system, analyzing data from various sources and as diverse as sales, payables, receivables and human resources.

The sheer number of KPI formulas from your general ledger accounts could consume massive stretches of your financial professionals’ days. Without the right data visualization software, your organization is facing potential errors, a lot of stress and it could lose valuable time.

With the right data visualization software, your financial experts have real-time numbers, can automate various calculations, and can create and share easy-to-use dashboards that offer all the KPIs and key numbers in one central place.

Phocas provides an insights hub and creates a community across your company by promoting organization-wide visibility. Your financial professionals can track KPIs specific to different roles or functions in the company or according to specific requirements or goals. Once the measurement is completed, all relevant parties can access the results to see how a specific KPI is functioning.

With Phocas, the KPI monitoring and measuring process becomes a living, breathing process that helps business leaders, staff, and managers quickly see how important KPIs are performing now and over time and can keep each other and stakeholders up to date at all times.