Part of crafting the perfect business strategy for your company is knowing which metrics to track. When it comes to monitoring performance, companies must use KPIs for Finance, or key performance indicators, to gain greater visibility over their company’s progress.
Our experts at Abacum have put together this list below of the bestKPIs to track to support future performance.
What are KPIs in Finance?
A KPI, or key performance indicator, is a quantifiable measure that helps companies assess how well they achieve their growth objectives and strategic goals. KPI reporting can help a business set benchmarks, evaluate business performance, identify organizational strengths, and ultimately assess the organization’s overall success.
Generally speaking, there are five different KPI categories: profitability, leverage, valuation, liquidity, and efficiency. These groups can be broken down into a wide range of key performance indicators that are used depending on what the organization, team, or individual is trying to achieve. Whether you are analyzingSaaSKPIs, operational KPIs, or even marketing KPIs, all functions within an organization should have their own set of metrics to prioritize.
What are the most important financial KPIs?
In this section, we are going to be breaking down the different metrics by KPI category:
Profitability
Operating Expense
Also known asOPEX, measures how much it costs a business to cover its day-to-day operations. Expenses that are often considered may include inventory costs, payroll, rent, and more.
Sales Growth Rate
Thesales growth rateis a critical metric that all organizations need to calculate. This KPI allows teams to see the organization’s sales growth over time. It is usually owned by the Chief Revenue Officer or Sales leader and monitored closely by the CFO.
Sales Growth Rate = (Current Net Sales – Previous Net Sales / Previous Net Sales) x 100
Gross Profit Margin
Thegross profit margincalculates how much money is left over from revenue after subtracting the cost of goods sold. This metric is often used to see whether or not a company is able to pay its operating expenses while having funds left over.
Gross Profit Margin = (Net Sales – Cost of Goods Sold) / Net Sales
Net Profit Margin
Thenet profit margin,also referred to as an organization’s bottom line, is the specific KPI that measures a company’s efficiency at generating profit rather than revenue. The net profit margin is a percentage that shows how much of each dollar earned translates into actual profits.
Net margin = Net profit / Revenue
Payback Period
This key important metric is used to determine the length of time an investment takes to be able to pay for itself. You can also think of thepayback periodas the breakeven point.
Payback Period = Initial Capital Cost for Project / Annual Savings or Earnings from Project
Interest Coverage Ratio
Anytime a company borrows money, it will have to pay interest. TheInterest Coverage Ratiois calculated to ensure a company is able to pay back the interest rate with its earnings before interest and taxes.
Interest Coverage = EBIT / Interest Expense
Leverage
Total Debt-to-Equity Ratio
Thetotal debt-to-equityratio is an important metric used to calculate how much debt a company uses to finance its current assets against its shareholder’s equity. A high ratio can indicate that a company is using too much investment instead of generating its own income.
Total-Debt-to-Equity = (Short-Term Debt + Long-Term Debt) / Shareholder’s Equity
Total Debt-to-Asset Ratio
Thedebt-to-asset ratiois a financial KPI used to evaluate the total amount of debt a company has compared to its assets. While a small amount of debt helps an organization with expansion, too much debt can take a start-up down.
Total-Debt-to-Asset = (Short-Term Debt + Long-Term Debt) / Total Assets
Valuation
Burn Rate
Theburn rateis an important metric that showcases the rate at which a company uses up its cash reserves in a loss-generating scenario. This popular metric is used when measuring the performance and assessing the valuation of a company. Since a start-up traditionally has a net income until it can get off the ground, investors will provide funding based on an organization’s burn rate.
Burn Rate = (Starting Balance – Ending Balance) / # Months
Return on Equity
Return on Equity(ROE) is one of themost importantKPIs for investorsand shareholders. It showcases how well the company is utilizing shareholder equity, allowing investors to gain greater insights into an organization’s potential profitability.
Return on Equity = Net Income / Average Shareholders’ Equity
Compound Average Growth Rate
TheCAGRis a financial performance metric that calculates the rate of return that would be necessary for an investment to grow from its initial balance to its ending one. This is a metric that CFOs often report to other shareholders.
CAGR = (Final Value / Beginning Value) 1/t – 1
Earnings Per Share
Earnings per share(EPS) is one of the leading KPIs for the financialreporting process. This key metric illustrates a company’s profit per outstanding share of stock. Often, EPS is either calculated on a quarterly or annual basis.
EPS = (Net Income – Preferred Dividends) / (End-of-Period Common Shares Outstanding)
Net Present Value
TheNPVis often used on a case-by-case basis to determine whether or not a project will be profitable or not. If the NPV is positive, it means that the project or investment is an attractive endeavor to pursue.
Net Present Value = Today’s Value of Expected Cash Flows – Today’s Value of Invested Cash
Future Value
Thefuture valuehelps evaluate whether or not a project or investment will be profitable. This calculation uses an assumed rate of return to estimate the future value.
Future Value = Present Value * (1 + Interest Rate) Period of Time
Internal Rate of Return
This financial KPI is used to estimate the profitability of potential investments. TheIRRis calculated by taking the difference between the current and expected value and the original beginning value, divided by the original value, and then multiplied by 100.
Internal Rate of Return = (Future Value / Present Value) 1 / # of period – 1
Return on Investment
ROIis one of the most important CFO KPIs to track. Return on investment is a popular metric often used by CFOs and financial managers to evaluate the profitability of how well an investment performed.
Return on Investment = (Current Value of Investment – Cost of Investment) / Cost of Investment
Liquidity
Operating Cash Flow
OCFis one of the most basic metrics used by CFOs today. This KPI metric measures the total income generated by regular business operations. In a healthy organization, the OCF will be represented as a positive number and used to decide how much capital expenditure a company can afford.
Operating Cash Flow = EBIT + Depreciation – Taxes – Change in Working Capital
Quick Ratio/Acid Test
As a chief financial officer, if you are looking to quickly evaluate the health of your organization, you will want to calculate yourquick ratiobusiness metric. This specific KPI shows whether a company has sufficient funds to cover short-term financial obligations immediately.
Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
Current Ratio
While the quick ratio andcurrent ratioare quite similar, the current ratio is a performance metric that demonstrates a company’s ability to pay off all its financial obligations within a full year.
Current Ratio = Current Assets / Current Liabilities
Working Capital
Working capitalis a key performance indicator that is used to highlight a company’s available assets to meet short-term financial obligations. Assets that contribute to working capital include cash, accounts receivable, short-term investments, etc.
Working Capital = Current Assets – Current Liabilities
Cash Conversion Cycle
Thecash conversion cycle(CCC) is a business metric that indicates how many days it would take for an organization to convert its goods to cash.
CCC = Days of Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding
Efficiency
Accounts Payable Turnover
This specific metric measures how quickly a company is able to make payments to its suppliers. If this number begins to decrease over time, it may be an indication of internal cash flow issues.
Accounts Payable (AP) Turnover = Total Supply Purchases / ((Beginning AP – Ending AP) / 2)
Tracking your FP&A KPIs: A few tips to stay zen
Are you slightly overwhelmed by all those financial metrics? Don’t you worry. Some of them are more important than others, and with a little bit of structure, you will be able to stay on top of your company’s performance while also maintaining your sanity. Here are some tips to get started:
- Align your finance team’s KPIs with your broader company objectives or OKRs. KPIs act as a compass to measure whether you are on the right track to achieve your company’s ultimate goals.
- Shortlist the most important financial KPIs that will give you the insight you need depending on your priorities: anearly-stage startupwill focus on tracking growth while a more established organization may focus more on profitability metrics. Choose the FP&A KPIs that will help you navigate your current development phase.
- Bring your leadership team together around your financial KPIs: ultimately, all functions are working together towards the same company goal, therefore make sure you bring your Sales and Marketing leaders on board for instance, as their own key measures will directly affect yours, and vice-versa.
- Empowerment and accountability are essential. Make sure you periodically review results against FP&A KPIs and take action if you are getting off-track.
- Adopt the right technology to boost efficiency and ensure data accuracy. Modern finance departments today are shifting from excel spreadsheets and swapping them forExcel alternativessuch asto help consolidate data, create KPI reports, and drive valuable insights for the rest of the team.
If you are looking for a solution to help streamline your data into a centralized platform, Abacum is the perfect option. To see how the Abacum platform can help keep track of your critical FP&A KPIs,request a demotoday.
