The 15 most important Financial KPIs in the data decade

In the business world, there are a lot of competing priorities and jargon to describe them, which makes it difficult to evaluate a priority’s true importance. Key performance indicators (KPIs) help cut through that noise so that an organization’s decision-makers can develop future-forward business strategies based on facts.

Simply put, KPIs help you know where you’ve been so you can get to your goal, faster. While KPIs have always been important for an organization, they’re more critical than ever before. With the increasingly competitive marketplace and the deluge of data, KPIs help your organization keep its strategic focus.

There are many types of KPIs but perhaps some of the most important ones are financial. 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?

Financial KPIs are a collection of distinct measurements that are used to monitor and assess your organization’s overall short-term and long-term financial performance. 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. No one has a crystal ball, but financial KPIs come close because you can identify, analyze, and gain insights into what the financial realities of your company are at this moment and better understand where they’re heading. 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 key performance indicators 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.

Which Financial KPIs are the best?

It’s easy to get overwhelmed with KPIs because there are numerous ones that you can use to monitor the health of your company’s finances. The good news is you don’t need to monitor that many KPIs to get plenty of value out of your metrics.

The most important thing is to determine which financial metrics will offer your business the best returns while not overwhelming you and causing more work than is necessary.

Selecting the right KPI Financial metrics for your organization

Deciding which KPIs are best for your organization is a large task. While some are universally applicable and employed, such as accounts receivable, accounts payable, and average invoice processing cost, others are industry specific. Here are a few KPIs and industries that use them regularly:

• Gross profit margin is used in advertising, online and general retail, building materials, software and transportation

• Current ratio is used in finance and accounting and healthcare and social services

• Quick ratio is used in numerous industries, including technology, financial, energy, services, transportation, retail

• Employee value-added and payroll headcount are used in multiple industries, as HR and employee matters are crucial

• Inventory turnover is used in distribution, wholesale, manufacturing, and retail

• Total asset turnover is used in distribution, wholesale, manufacturing, retail, and banking

• Return on assets has some limitations and should only be used contextually within its own industry by the company, but it is useful to most industries

Here are a few additional factors to consider when selecting the best KPIs for your business:

• Company goals

• Business model

• Specific operating processes

• Company size

When evaluating these factors and selecting KPIs, it’s critical to collaborate with the various business units at your organization. Your finance team will want to offer input into what key performance measures to track from finance data.

Let’s explore the top 15 KPIs for financial reporting and why they’re so important for your business.

Financial metrics: The top 15 KPIs

If you’re ready to ramp up the monitoring of your financial KPIs, here are the top ones to consider:

Sales Growth | Gross Profit Margin | Accounts Payable Turnover | Accounts Receivable Turnover | Working Capital
Current Ratio | Quick Ratio | Operating Cash Flow | Human Capital Value Added | Days Payable Outstanding
Payroll Headcount Ratio | Inventory Turnover | Total Asset Turnover | Return on Assets | Budget Variance

Financial KPI Insights

Now that you know the 15 of the most important financial reporting KPIs, here are some insights to help you choose which ones will drive success 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 x 100

Why monitor this financial KPI?

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

Sales growth is a profitability KPI. Your sales growth KPI compares your current and previous performance, and you can decide whether you compare last year or last quarter.

When is it best to use Sales Growth as a KPI?

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 x 100%

Why monitor this financial KPI?

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.

When is it best to use Gross Profit Margin as a 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 key performance indicator 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

Why monitor this financial KPI?

The accounts payable 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.

When is it best to use Accounts Payable Turnover as a 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

Why monitor this financial KPI?

The accounts receivable 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.

When is it best to use Accounts Receivable Turnover as a 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. 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

Why monitor this financial KPI?

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.

When is it best to use Working Capital as a 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.

6. 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

Why monitor this financial KPI?

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.

When is it best to use Current Ratio as a 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.

7. 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

Why monitor this financial KPI?

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.

When is it best to use Quick Ratio as a 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. A good result reveals competence and sound performance.

8. Operating Cash Flow

The goal of operating cash flow (OCF) is to measure a business’s ability to pay for short-term liabilities with readily available cash on hand from core operations.

Operating cash flow ratio = Operating cash flow / Current liabilities

Why monitor this financial KPI?

You need to understand your operating cash flow in order to know how easily you can pay for deliveries, equipment maintenance, and other operating expenses.

To better calculate operating cash flow and monitor this KPI, refer to your company’s cash flow statements instead of using an income statement or balance sheet. This strategy removes the impact of non-cash operating expenses to provide a clear view of available cash. Operating cash flow is a liquidity KPI ratio.

When is it best to use Operating Cash Flow as a KPI?

When you need to take the pulse of your company’s financial success, an operating cash flow ratio is the way to go. It lets you know whether your company can generate the necessary positive cash flow to pay expenses and take the next steps to grow your operations.

9. Human Capital Value Added

An organization’s employees are vital to daily operations and bottom line and are much more than “intangible assets” since their value is measurable. Employee value added, also known as human capital value added (HCVA), is a measure of the financial value a full-time employee (FTE) brings to the company. In other words, it shows how the average employee contributes to the organization’s bottom line.

HCVA = (Revenue - (Total Costs - Employment Cost))/ FTE

or

HCVA = Operating Profit + Employment Cost/FTE

Employee value added is a profitability KPI, indicating the value provided by the employees you hire.

When is it best to use Human Capital Value Added as a KPI?

Since HR departments don’t typically measure the impact employees have on an organization’s financial performance, it’s a good idea to use the HCVA ratio to measure the value that employees add every quarter. Since you pay employees through salary and compensation, it’s vital to know how their work affects the success of your business.

10. Days Payable Outstanding

A days payable outstanding (DPO) KPI is a financial ratio, indicating the average amount of time, expressed in days, that an organization typically takes to pay its invoices, bills and other debts to its trade creditors, such as financiers, vendors and other suppliers of goods and services.

Businesses that use this KPI typically do so quarterly or annually to gauge how well their cash outflows are being managed.

DPO = Ending Accounts Payable / (Cost of Sales / Number of Days)

Why monitor this KPI?

Days payable outstanding is a liquidity KPI that helps determine how much cash is on hand (near-term liquidity) while taking an extra stretch of time to pay a supplier without any penalties. That means your organization can use this cash without restrictions to benefit your profit margins and increase free cash flows (FCFs).

When is it best to use Days Payable Outstanding as a KPI?

If you need some extra bargaining power for an upcoming purchase for your organization, a positive DPO can help you negotiate more favorable terms, such as payment date extensions and price reductions. Having DPO as a KPI shows that you’re monitoring it over time.

11. Payroll Headcount Ratio

Technically an efficiency and productivity KPI, payroll headcount ratio also works as an employee value added metric. It compares the ratio between part-time and full-time employees and might include contractors and freelancers. The goal of the metric is to assess how your company utilizes your labor force.

Payroll headcount ratio = HR headcount / Total company headcount

Why monitor this KPI?

Monitoring the number of employees on staff and those needed has never been more important than in the past few years. It’s crucial to know how employees are performing and whether more employees are needed to support your organization.

When is it best to use Payroll Headcount Ratio as a KPI?

Anytime you need to make a hiring decision, this efficiency/employee value added KPI can be useful. It reveals how payroll headcount drives financial performance and how finance performance drives payroll headcount. Essentially, if you are concerned that your company is spending more than you earn, it’s good to monitor this KPI. It’s also an indicator of how well your HR team is doing with hiring for employee productivity and retention.

12. 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

Why monitor this financial KPI?

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.

When is it best to use Inventory Turnover as a 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.

13. Total Asset Turnover

The total asset turnover measures how efficiently assets are used. It takes into account the value of your organization’s sales or revenue numbers relative to the value of its overall assets.

Total Asset Turnover = Revenue / (Beginning Total Assets + Ending Total Assets / 2)

Why monitor this financial KPI?

The total asset turnover KPI can show how efficiently your business uses assets to generate revenue. Total asset turnover is an efficiency KPI.

When is it best to use Total Asset Turnover as a KPI?

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.

14. Return on Assets

The return on assets (ROA) KPI shows how well your company’s operations management team uses profits to generate profit. The assets considered include AR, inventory, and fixed assets like real estate and equipment owned.

ROA = Net Profit / (Beginning Total Assets + Ending Total Assets) / 2

Why monitor this financial KPI?

ROA KPI reports provide investors and stakeholders with insights into how efficiently your company’s management is using assets to generate earnings.ROA is an efficiency KPI.

When is it best to use Return on Assets as a KPI?

When you want to get a better idea of how your managing team is doing at earning money from your assets, ROA is a great KPI.

15. 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 x 100

Why monitor this financial KPI?

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.

When is it best to use Budget Variance as a 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 your KPI metrics monitoring with powerful and easy-to-use data visualization software

Financial key performance indicators 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.

Contact us to learn more about the 15 KPIs listed above or any others you feel are relevant to your business