Key Performance Indicators, or financial KPIs, are indicators that reveal a company’s financial results in the evaluated period. They are indispensable tools to analyze the organization’s performance and have a solid basis in the decision-making process. After all, doing management by indicators will show what needs to be improved and what has worked.
Through KPIs you will monitor the progress of the business’s financial goals and will be able to measure the performance of strategies and processes. Check out below what are the top five financial indicators that your company needs to monitor.
Financial liquidity KPIs measures your organization’s ability to generate money in the short term. This information is necessary to assess whether the company can meet demands and shorter term commitments.
When this indicator is low, it means that the business’s resources and investments are allocated to long-term objectives and processes. As such, the short-term ones, such as payment of suppliers and company expenses, are affected. On the other hand, when it presents high results, it is a sign that there is idle revenue.
Both situations are detrimental, and it is important to work in search of a balance between high and low. An example of a liquidity ratio that can be assessed is working capital. The formula used for the calculation is: NWC = CA – CL. NWC refers to net working capital, CA is current assets (accounts receivable and cash on hand, for example) and CL is current liabilities (accounts payable, supplier debts, loans, etc.).
A profitability indicator measures the investments and activities that generated revenue for the company; that is, it is a balance between the profit and the volume of your investment. To calculate this financial KPI, just use the formula: profitability = (net profit / investments) X 100.
From the result, you will have a guide on the strategies that have been showing good returns and which ones are not generating good returns. In addition, there is no adequate standard and fixed profitability index, as it is necessary to evaluate the investment and the conditions of the company.
3. Return on Investment (ROI)
Among the most important financial KPIS for decision-making we have ROI (Return on Investment). This indicator measures the conversion rate, that is, the results of an investment. It can be used to evaluate strategies, financial investments and marketing campaigns, for example.
With this result, you will have an idea about the investments that generate good results and which ones have flaws or are inefficient sources of improvements. To quantify your earnings using this indicator, the formula is: ROI = (gain obtained – investment) / investment.
Invoicing indicators are the most important for financial management, as they indicate how much the organization is selling and generating revenue. It will decide which sectors and processes need optimization and cost reduction, and whether there is a need to reassess the prices charged. However, keep in mind that the amount invoiced will not always be similar to that received. For the calculation, simply sum all your revenues from the evaluated period.
Debt KPIs are applied to assess your ability to settle debts and to determine the amount owed. The higher the amount, the more attention you need to have, as it can affect the operation of your activities. In addition, the higher the debt, the lower its liquidity will be. A simple way to calculate this indicator is: DR (Debt Ratio) = (liabilities / assets) x 100.
The best way to measure and monitor financial KPIs is through technology. Integrated management software provides all the updated data needed to calculate the indicators. In addition, these solutions make the monitoring of indicators faster, more efficient and more accurate.
Speaking of methods and tools that assist in decision-making, check out our article on what predictive analysis is and how it increases your decision-making power.