Finance KPI: definition, types, importance and uses

By Indeed Editorial Team

Published 8 July 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Using key performance indicators (KPIs) can help measure company and individual success and highlight what areas need improvement. Knowing which financial metrics to use to gain a better outlook can help create more efficient operations and productivity. Understanding when and how to use each metric and the benefits they offer can also help you determine the best type for you. In this article, we define what finance KPIs are and their importance, explain how to use them efficiently and how to decide on the best finance KPIs to implement.

What is a finance KPI?

Finance KPIs are measurements that give insight into a company's fundamental operational and financial strength. Many KPIs, such as the profit-to-revenue ratio, emphasise critical data connections. A single key performance indicator assessment might give a helpful snapshot of the business's performance at a certain point in time. KPIs become even more useful when you use them to examine patterns over time, assess progress against objectives or compare the company to other businesses. Their importance grows even more when firms examine them alongside other important KPIs to give a more holistic picture of the business.

Financial metrics and KPIs allow business executives to focus on the wider picture, helping them to manage the business and identify any immediate concerns without becoming overwhelmed by the specifics of the company's inner workings. These bits of data indicate when operations are going well and when there are substantial changes or warning indications. KPIs also assist management in achieving particular goals for the organisation.

What is a financial statement analysis?

Financial statement analysis is the practice of evaluating essential financial records to gain a deeper understanding of how the organisation is operating. Some of the most important types of financial statements, particularly for managers, include:

  • Balance sheet: A statement that shows a company's assets, expenditures and proprietors' equity at a certain point in time.

  • Income statement: A statement that summarises a company's sales, costs and earnings for a given period.

  • Cash flow statement: A statement that shows how operations from the balance sheet impact cash flow. You can classify these activities as operational, investment and finance.

  • Annual report: a document that details the activities and financial situation of a corporation.

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What are the types of financial KPIs?

Corporations use many forms of KPIs based on their sector, size and goals. The following are some of the most prevalent forms of KPIs:

  • sales: net income, gross margin, expenses and debt-to-equity ratio

  • marketing metrics: marketing budget, web traffic, click-through rate and SEO ranking

  • customer relations: in-store foot circulation, customer satisfaction, customer service tickets and resolution timeframes

  • human resource management and employment: the cost per hire, the number of promotions, staff turnover and job satisfaction

Employee success includes meeting sales objectives, finishing projects on schedule, providing excellent customer service and minimising absenteeism. Some key performance indicators, such as net profit, are easily measurable. Others, like customer satisfaction, are more subjective, making quantification more difficult.

Which KPIs are the best?

The best KPIs for every company help team leaders assess their strengths and areas for improvement. While the precise measurements differ from one business to the next, automatic KPIs are the most effective technique to track success. After deciding on a set of KPIs that correspond to the company's goals, automate their calculations and update them regularly by linking the accounting and ERP systems. This guarantees that the KPIs represent the current status of the business.

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How to find the best financial KPIs

Choosing the most helpful and significant KPIs for a company might be difficult. The KPIs you select depend on your company's goals, business strategy and individual operational procedures. Some KPIs, such as the quick ratio, are nearly always relevant. Other KPIs vary per industry. Manufacturers, for instance, check the state of their inventory, whereas service organisations focus on income per employee when analysing efficiency. Read on to learn how to find the best financial KPIs.

1. Growth profit margin

This is an advanced but crucial assessment of the company's effectiveness and growth. You generally represent it as a percentage and determine it as gross profit divided by sales ratio. Profit as a percentage of sales simplifies the analysis of profitability trends and patterns and the comparison of profitability with other businesses.

2. Operating cash flow ratio

This liquidity KPI ratio assesses a company's capacity to cover short-term commitments with cash that core activities generated. You can divide operating cash flow by current liabilities to compute it. The cash that a company's operational activities earned is its OCF, whereas current liabilities comprise accounts payable due within a year. OCF extracts data from a business's cash flow statement instead of its balance sheet, removing the impact of non-cash operational expenditures.

3. Working capital

People frequently use this liquidity metric in tandem with other liquidity measurements, like the current ratio. It evaluates the business' current assets to its current liabilities in the same way as the current ratio does. It does express the outcome in pounds rather than as a ratio. Low working capital suggests that the business struggle pays its financial obligations. An extremely large number may indicate that it is not making the best use of its resources.

4. Budget variance

This compares the actual performance of the organisation to budgets or predictions. Any financial metric, such as profitability or costs, examines budget variation. Express the variation in terms of money or, more commonly, as a percentage of the allocated amount.

5. Fixed asset turnover ratio

This demonstrates a business' capacity to earn revenue from its fixed-asset investment. This KPI is especially important for businesses that invest heavily in land, plant, and hardware to enhance output and profits. A greater ratio shows that the business is making better use of its fixed assets. Divide total sales by net cumulative depreciation to determine the average fixed asset balance.

6. Quick ratio

Another sort of liquidity ratio that assesses a company's capacity to meet short-term commitments is the fast ratio, often known as an acid-test ratio. In its numerator, the quick ratio only includes highly liquid assets such as marketable securities. The premise is that some current assets, such as inventories, are not always straightforward to convert into cash.

7. Current account receivable

This financial KPI calculates the sum of money a company's creditors owe to the company. The current accounts receivable helps to measure forthcoming income and calculates average debtor days. A high current accounts receivable measure suggests that a company is unable to deal with long-term creditors and, as a result, is losing money. When people or businesses fail to pay their payments, they are in default.

8. Liquidity

This KPI measures the amount of money available in the company. The difference between the present assets and debts is liquidity. Assets include money in the bank, bills that have already been paid out and inventory. Accounts payable are examples of liabilities, and when assessing the liquidity, consider your cash flow. This may include how long it takes to obtain a return on your investment or the amount it takes to recover costs spent on purchasing equipment, producing a new product or doing a project. Your aim is to minimise your cash flow as much as achievable over time to produce more liquidity.

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Using financial management software to monitor KPIs

In addition to the standard financial metrics and KPIs described above, organisations track speciality KPIs that focus on their internal workings or operations, such as those relating to inventories and human resources. Manually mapping and computing financial KPI formulae from general ledger accounts is an error-prone operation. As a result, most companies hire software to automate these processes and develop dashboards, including all of these essential statistics in one spot.

Financial KPIs and metrics enable business executives, managers and employees to easily assess how their firm is operating and track any significant changes over time. They also assist leaders in developing essential objectives and keeping their workforce focused on quantifiable targets. Financial software that gives automatic, precise, real-time KPIs keeps the organisation on track rather than becoming overwhelmed by a lot of data.

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