The Basics of Financial KPI Tracking

Introduction

A financial KPI (Key Performance Indicator) is a metric used to measure financial performance and progress of a company or industry. It is composed of relevant financial data and measurements that can help identify areas of strength and weaknesses for improvement.

Financial KPIs allow businesses to track their progress and assess the impact of various strategies and decisions. They also help businesses stay on top of their finances, identify areas for cost savings, and even spot opportunities for growth. Knowing when and what KPIs to track enables sound financial management and aids in creating data-driven decisions.

Purpose of Tracking Financial KPIs

Tracking financial KPIs can help businesses evaluate their performance, determine the success of new strategies, and identify areas in need of improvement. It allows business owners to understand their businesses’ financial health and make decisions to push the business forward.

Financial KPIs can provide measurements of success over a period of time and help businesses better prepare for the future. It can also inform businesses when it’s time to rethink strategies or invest in new areas to increase revenue or lower costs.

KPIs Related To Cash/ Liquidity

Key Performance Indicators (KPIs) related to cash/liquidity provide insight into the financial health of a company and its ability to stay afloat, especially during tougher economic times. To help effectively measure how well a company’s liquidity is doing, two of the most important KPIs to monitor are the Cash Balance and Days Cash On Hand.

Cash Balance

The Cash Balance refers to the amount of working capital that a company has available at any given time, and it's calculated by subtracting total liabilities from total current assets. A healthy Cash Balance means that the company has enough cash to pay its bills and make purchases, such as overhead and inventory expenses. When the Cash Balance is low, a company is at risk of default or insolvency. Therefore, the Cash Balance is critical to monitor.

Days Cash On Hand

Days Cash On Hand is a measure of an organization’s ability to meet financial obligations on time. It is calculated by dividing the Cash Balance by total daily operating costs. The higher the number of 'days cash on hand,' the better able a company is to pay bills and make necessary purchases quickly. A low number of “days cash on hand” can be an indication of financial trouble. Generally, most companies aim to have around 85-90 days of cash on hand.

Monitoring the Cash Balance and Days Cash On Hand is important for understanding a company’s financial health and position on liquidity. These are two key KPIs that businesses should track on a regular basis.

KPIs Related To Profitability

Having measurable business objectives is a critical aspect to any successful business. Measuring the performance and keeping an eye on the various metrics associated with profitability can be an insightful way to track the health of your business. So what Key Performance Indicators (KPIs) are related to profitability? Let’s take a look at three of the most important ones.

Gross Margin Percentage

Gross margin percentage is a measure of profitability that is expressed as the ratio of gross profit divided by total revenue. It shows the portion of each dollar of sales revenue that is left after subtracting the cost of goods sold. It is expressed as a percentage, with a higher percentage indicating more revenue per dollar left after subtracting cost of goods sold. This KPI will help you to understand whether or not you are making money off of the products or services that you are selling.

Profit Margin Percentage

Profit margin percentage is a measure of profitability that is expressed as the ratio of net profit divided by total revenue. It is expressed as a percentage and measures the amount of each dollar of sales revenue that results in actual profit. This KPI will help you to understand what portion of sales revenue is left after all expenses and taxes have been paid. It is a useful way to measure the performance of your business and help you to identify areas where you may need to make changes to increase your profit margin.

Operating Profit Margin

Operating profit margin is a measure of profitability that is expressed as the ratio of total operating income divided by total revenue. This percentage is an indication of how efficient a business is in managing its operating costs and is a direct measure of how well a business is doing from an operational perspective. This KPI is important to track because it provides a more direct indication of the operational performance of a business.

By monitoring these three KPIs, you will be able to get a better understanding of the financial health of your business and how to make improvements. With the use of the right financial tracking system, you can easily monitor these and other KPIs to ensure that your business is running as efficiently and profitably as possible.

KPIs Related To Expenses

Businesses use key performance indicators (KPIs) to measure their financial performance against predetermined goals. These metrics help companies to identify areas of opportunity in order to cut costs and maximize profitability. This article will explore different KPIs related to expenses, and explain how they can be used to measure financial performance.

Cost of Goods Sold (COGS)

The Cost of Goods Sold (COGS) is a measure of the direct costs associated with producing and selling goods. This includes materials, labor and other expenses related to goods production. COGS does not include indirect expenses such as advertising and administrative costs. By tracking COGS, companies can assess their production costs and adjust as necessary to maximize profits.

Operating Expense Ratio

The Operating Expense Ratio is a measure of how much of a business’s operating costs are allocated to producing revenue. It is calculated by dividing the total operating expenses by total revenue. The Operating Expense Ratio can help businesses identify opportunities to reduce costs and maximize profits, while also monitoring changes in costs and revenue.

By tracking these KPIs related to expenses, businesses can measure their financial performance and identify areas of opportunity to reduce costs and maximize profits.

KPIs Related To Debt

Tracking KPIs related to debt is an important component of understanding a company's financial performance. A variety of measures can be used, each giving a different view of how well a company is managing its debt. Some of the most important KPIs related to debt include the debt-to-income ratio, debt-to-equity ratio, and interest coverage ratio.

Debt-To-Income Ratio

The debt-to-income ratio (DTI) is the ratio of a company's total debt to its total income. This ratio is calculated by dividing total debt by total income and expressing the result as a percentage. The higher a company's DTI, the more reliant on debt it is to finance its operations, and the higher risks it is taking. A high debt-to-income ratio may indicate problems with liquidity, and a lower ratio may indicate a more sustainable business model.

Debt-to-Equity Ratio

The debt-to-equity ratio (D/E) is the ratio of a company's total debt to its total equity. This ratio is calculated by dividing total debt by total equity and expressing the result as a percentage. The higher a company's D/E, the more reliant on debt it is to finance its operations and the higher risks it is taking. A high debt-to-equity ratio may indicate problems with liquidity, while a lower ratio may indicate a more sustainable business model.

Interest Coverage Ratio

The interest coverage ratio (ICR) is the ratio of a company's earnings before interest and taxes (EBIT) to its interest payments. This ratio is calculated by dividing EBIT by interest payments and expressing the result as a percentage. The higher a company's ICR, the more sustainable its debt obligations are. A high ICR may indicate that a company is more likely to be able to meet its debt obligations, while a low ICR may indicate that the company is under significant financial stress.

By tracking KPIs related to debt, companies can get a better understanding of their financial performance, risk management, and overall health. Knowing these numbers and creating plans to improve them can help companies manage their debt responsibly and ensure long-term viability.

KPIs Related To Growth

In order to ensure that a company is measuring its performance and achieving its growth objectives, it is essential to track and measure key performance indicators (KPIs). Here, we will look at a few of the most important KPIs related to growth.

Sales Growth Rate

The sales growth rate is a key measure of performance used to track the growth of a company’s revenues over a period of time. It is calculated by taking the difference in total revenue for two different periods and then dividing that by the revenue in the earlier period. The sales growth rate is an important indicator of a company’s financial health, and a key metric used to measure the success of a company’s sales strategy.

Organic Growth Rate

The organic growth rate is a measure of the increase in sales revenue that results from a company’s own activities, such as increased marketing and product development. This measure does not take into account any factors such as acquired companies, joint ventures, etc. It is an important metric for measuring the success of a company’s organic growth strategy.

Market Penetration

Market penetration is used to measure the extent to which a product has been accepted by the market. It is typically calculated by dividing the total revenue generated by the product by the total revenue of the corresponding market. Market penetration is an important metric to track in order to gauge the success of a product or service. It can also provide important insights into where a company’s growth may be restricted or hindered.

In conclusion, these KPIs related to growth can provide valuable insights into the performance and financial health of a company. It is important to track these metrics regularly in order to ensure that a company is achieving its growth objectives and is on track to achieve its goals.

Conclusion

Financial KPI tracking is an important part of managing a business and understanding how your finances are trending over time. In this post, we’ve gone over the basics of tracking financial KPIs and how they can provide insight into your business performance.

Summary of KPIs Discussed

We discussed several key financial KPIs that business owners can track and use as indicators to measure the overall financial health of the organization. These include operating margin, return on assets, return on equity, current ratio, account payable turnover ratio and days sales outstanding.

Final Overview of Financial KPI Tracking

Financial KPI tracking helps business owners gain a better understanding of their overall financial position and performance. By taking the time to review and track these KPIs on a regular basis, it is possible to identify weaknesses, opportunities and areas for improvement in order to maximize profits and make sound business decisions.