5 Important Financial KPIs a Business Should Be Tracking

By admin, April 26, 2018

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Key Performance Indicators (KPIs) are measurement tools that help you track whether your efforts are yielding results or not. For an enterprise, these tools provide an overview of your business’s health and identify the underperforming areas to prevent losses in future.

The KPI quantification is necessary for a business as it aids in reaching your goals by determining the sections that need your attention, the sections where you’re overspending money and prioritising your tasks accordingly. According to a survey conducted by Geckoboard in 2016, small and medium-sized businesses who tracked KPIs were twice as likely to achieve their targets compared to those businesses who don’t.

Here are 5 important KPIs you should be tracking, as a business owner, to measure the effectiveness of your efforts.

1) Profit & Loss Statement

Your business’ profit and loss reports clearly indicate your company’s success or failure. It is a document that records your business’ income and expenditures of a specific duration and shows a profit (when income exceeds expenses) or loss (when expenses are more than income). You can analyze your P&L statement to quarterly or annually to find out several things. For example, how much your business is spending and monitor whether the expenses are essential, make cost-cutting strategies according to the results and analyse how your business is growing over time.

2) Operating Cash Flow

The operating cash flow of a business indicates its ability to pay for deliveries and operating expenses. An analysis of your operating cash flow is necessary to know whether your business is generating enough cash to meet its expenses, support the capital investments and spend money for its growth. It also helps in identifying cash flow problems in the early stages and make necessary adjustments to avoid serious financial issues.

3) Revenue Growth Rate

As the name suggests, the revenue growth rate of a business is the rate at which your organisation’s revenue or income is increasing. Calculate your business’s growth rate by dividing your current year’s revenue by total revenue from the previous year. By analysing the revenue growth rate regularly, you can find out the actual status of your business whether it’s growing, declining or plateauing and act accordingly.

4) Working Capital

Working capital refers to the cash that is immediately available in the business. You can calculate it subtracting your company’s current liabilities with its current assets. It will help you find out the available capital of your business which can be used in its day-to-day trading operations and how much assets you have to cover the short-term financial liabilities of your business.

5) Current Ratio

The current ratio is a liquidity ratio as it measures the solvency of a business. It calculates whether your business has enough resources to meet its short-term and long-term obligations. You can find out your company’s current ratio by dividing current assets by current liabilities. This is an important KPI as it will give a clear picture of your business’ operating cycle and its ability to turn the product into cash. That said, tracking this ratio is necessary to quickly assess your company’s valuation and risk factors.

Regular tracking of the above-mentioned financial KPIs is necessary to understand the actual position of your business and make adjustments in your strategies for growth. These indicators help you measure various factors that hamper your business’s growth and work in the right direction to make the most of your efforts.