Are you struggling to analyse the financial position of your business in different key areas? For example, you can analyse the financial performance of a company by calculating specific financial performance indicators. On the other hand, you can estimate the efficiency of business operations and customer service by using other Key Performance Indicators (KPIs).
These easy-to-calculate KPIs help managers and businesspersons make informed and crucial decisions at the right time to avoid any potential financial losses. Therefore, every company needs to calculate these KPIs to examine the overall financial health of their business activities.
In this blog, we will share 12 key financial performance indicators you should be tracking. So, let’s jump into this interesting discussion!
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12 Key Performance Indicators
Studying the balance sheet and income statement of a business does not represent the whole picture of a business. For this, a business is required to calculate different KPIs to get insightful information about a company. Here is the list of 12 KPIs you can use to examine the financial performance of your company.
1. Gross Profit Margin
To measure the profitability of a firm, managers use Gross profit margin as it helps them to analyse how much profit they have earned. Gross profit margin is calculated by excluding all the direct cost of production from revenue. what is left at the end is the gross profit margin. It is usually expressed as a percentage.
Gross Profit Margin = [(Revenue – Cost of Goods Sold)/Revenue] * 100
2. Net Profit Margin
As gross profit margin excludes only production cost or the cost of products sold, the net profit margin is calculated by subtracting other costs as well. These costs comprise operating expenses, cost of production, interest, and taxes. When all of these costs are excluded from revenue, the remaining profit is called net profit.
Net Profit Margin = (Net Profit/ Revenue) * 100
3. Current Ratio
The current ratio is the most important liquidity ratio to measure the short-term liabilities of a company. A company must be in a position to carry out its one-year expenses with its current assets and current liabilities. The current ratio is calculated by dividing the current assets by current liabilities.
Current Ration = Current Assets/ Current Liabilities
4. Debt-to-Equity Ratio
The debt to equity ratio measures how much finance is being obtained from shareholders and how much is carried out by borrowing loans. This is the reason it is known as the debt-to-equity ratio. It is also called a solvency ratio.
Debt-to-Equity Ratio = Total Debt/ Total Equity
5. Operating Cash Flow
Operating cash flow measures the cash requirements of a business. It reflects how well a company is managing its cash requirements. The managers may need more cash due to the increased operating expenses and this KPI identifies that requirement of cash. Operating Cash Flow is calculated as:
Operating Cash Flow = Operating Income + Depreciation – Taxes + Change in Working Capital
6. Working Capital
Working capital is calculated by subtracting current liabilities from current assets. This measures the liquidity of a company to analyse how much a company is able to carry out its daily expenditures smoothly.
Working Capital = Current Assets – Current Liabilities
Leverage measures how much assets are being held by the equity. As the equity increases, the risk of business becomes higher. The leverage of a business is calculated by dividing the assets by equity.
Leverage = Total Assets/ Total Equity
8. Total Asset Turnover
Total asset turnover is one of the most crucial ratios for measuring the efficiency of a business. It measures the revenue generated by using the total assets of a company. The higher the turnover, the greater the efficiency.
Total Asset Turnover = Revenue/ Average Total Assets
9. Return on Equity
This ratio measures the capability of a business of earning profit for its shareholders. ROE is calculated by dividing the net profit by the equity of shareholders.
ROE = Net Income/ Shareholder’s Equity
10. Quick Ratio
A quick ratio is also a liquidity ratio except that it includes only the most liquid assets of a company. In other words, only those assets, that are liquid or can be converted into liquid assets conveniently, become part of a quick ratio.
Quick Ratio = (Current Assets – Inventory)/Current Liabilities
11. Inventory Turnover
Inventory turnover is another efficiency ratio. It measures how much inventory has been sold by a company during one accounting or financial year. The managers use this ratio to analyse how many goods are being sold and how many goods are in the inventory.
Inventory Turnover = Net Sales/ Average Inventory at Selling Price
12. Return on Assets
Return on Assets (ROA) is another measure of the profitability of a company. It measures how profitable a firm is as compared to its assets. The managers can strive to earn higher returns upon all the assets. ROA is calculated by dividing net profit by total assets.
ROA = Net Income/ Total Assets
In sum, KPIs help a business get deep insights into the financial position of their revenues, expenses, costs, profit, customer satisfaction, finance management, and other business operations. These exclusive indicators inform the owners of a business about the potential errors and inefficiencies in a business.
As a result, they can take crucial steps to increase the efficiency, profitability, and liquidity of their business operations at the right time. So, if you analyse the performance of your business by calculating these 12 key financial performance indicators, you can scale up your business efficiently, smartly, and instantly.
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This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances.