13 Financial Health Key Performance Indicator (KPI) in Business for Decision making

July 13, 2020
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Key Performance Indicators (KPIs) are tools for measuring and tracking performance and help to attain the objective of the company. KPIs provide you with a general overview of the overall health of your business.

Every business model is unique and selecting appropriate KPIs and using them effectively will help to improve your business performance. KPIs tools help your business to grow and attain the targets and objectives of the company.

KPIs help you to be proactive and make relevant changes in non-performing areas, preventing business losses. KPIs ensure the long-term sustainability of your company and helps increase your business's value as an investment. Here we are sharing some of the KPIs which are important for every company.

1. Operating Cash Flow

Operating Cash Flow help business to measure the amount generated by company during the normal life cycle. Operating Cash Flow KPIs indicate how much effectively whether a company can generate positive cash flow to maintain growth its operation, otherwise it required external financing.

Direct Method: Operating Cash Flow= Total Revenue - Operating Expenses

Indirect Method: Operating Cash Flow= Net Income + Non-Cash Expenses (+/-) Changes in Assets & Liabilities

Operating Cash Flow is an important benchmark that helps to determine the financial success of company core business activity.

2. Working Capital 

Working Capital KPIs help to measures currently available assets of the organization to meet short terms financial obligations. Working capital includes current assets like cash, short term investment, and trade receivable, demonstrating the business liquidity.

Cash available immediately is known as Working capital. Working Capital is calculated by:

Working Capital: Current Assets – Current Liabilities.

3. Current Ratio

The current Ratio helps to measure an organization ability to pay off its shorts term obligation with its current assets. It helps investors and creditors to understand the liquidity of the company and how the company will easily able to meet current liabilities.

Current Ratio: Current Assets/Current Liabilities.

A higher currents ratio is always favorable than a lower current ratio because it shows the company can more easily make payment of current debts.

Read also: 6 reasons why in house accounting is costly

 4. Debt to Equity Ratio

Debt to Equity Ratio indicates how well your business is funding its growth and how well you are utilizing your shareholders' investments. This KPIs help you and your shareholder of the company to find out how much debt the business has accrued to make the business profitable. 

Debt to Equity Ratio is used to evaluate a company's financial leverage. High debt to equity ratio is often associated with high risk; it means that a company policy has been aggressive in financing its growth with debt.

Debt to Equity Ratio calculated by = Debt/ Equity (D/E)

Good Debt to Equity Ratio: A good debt to equity ratio is around 1 to 1.5. A debt to equity ratio of 1 mean that equity holders / Investors and lenders has an equal stake in the business assets

5. Accounts Payable Turnovers 

Accounts Payable Turnover KPI helps you to understand at which rate the organization pays off suppliers. Accounts Payable Turnover ratio is computed by dividing the total costs of sales during a period by your average accounts payable for that period.

Payable turnover Ratio= Net Credit Purchase / Average Accounts Payable

This KPIs Indicates how much your company takes time to pay off its suppliers. Low Account Payable Turnover ratio indicates slow payments to suppliers for purchases on credit and vice versa. 

 6. Accounts Receivable Turnover

Accounts receivable turnover ratio help to measure used to quantify a company's effectiveness in collecting its receivables or money owed by clients. This KPIs help to assess how well the company uses and manages the credit it extends to clients and how quickly short term debt is collected or paid.

Receivable Turnover Ratio: Net Credit Sales /Average Accounts Receivable

High Accounts receivable turnover ratio indicates the company’s collection of account receivable work efficiently and pay debts quickly.

 7. Inventory Turnover

Inventory Turnover indicates how frequently the company sells its physical products. This KPIs help to identify whether the company product sells his product slowly or quickly.

Inventory Turnover= Cost of goods sold / Average inventory

Low Inventory Turnover ratio indicates that the product is not in demand and it may be price tag is not proper.

8. Return on Equity

Return on Equity helps to measure the financial performance of the business and how shareholders fund used by the company. If return on equity grows over time, it’s a good sign that management used effectively fund without much of new capital moving forward.

Return on equity = All earnings (net Income) / Shareholder equity

ROE also measures management’s performance to generate income from equity. This ratio is used for valuation on company. The investor also focuses on return on equity of business before making any investment.

9. Return on Assets

Return on Assets KPIs measure how effectively a company can earn a return over investment make in assets. ROA shows how the company can convert money used into assets into net income or profits.

Assets of the company are funded by either equity and debt, some investors try to disregard the costs of acquisition of assets in the return calculation by adding back interest expense in a formula.

Return on Assets Ratio= Net income / Average total asset

ROA is profitability ratio that gives idea to investor how effectively company can cover its investment in assets.

10. Net profit Margin Ratio

Net profit Margin Ratio help to measure what percentage of money earned by during the company at the end of the financial year. Net margin KPIs measure the overall profitability of a company and considers all the operating and financing expenses by the company in its daily operations.

Net Profit Margin= Net profit / Total revenue

11. Quick Ratio

Quick Ratio indicates the company capacity to pay its current liabilities without needing to sell any things and required additional funds. Quick ratio KPIs is to be considered a more conservative measure than the current ratio, which includes all current assets as coverage for current liabilities.

The quick= liquid assets / Current liabilities

Higher Quick ratio indicates better company’s liquidity and financial health, while lower quick ratio, the more likely we said the company will suffer in paying debts.

12. LOB (Line of Business) Revenue Vs. Target

Lob Revenue Vs. Target helps you to compares actual revenue with projected revenue of the business. This KPIs helps in tracking and analyzing discrepancies between actual revenue and projections helps you to understand how well a particular department performing.           

13. Customer acquisition ratio

Customer acquisition ratio helps management to determine how much revenue you earn per new each customer acquired.

To understand the customer acquisition ratio, you need to focus on two key terms. First is the net expected lifetime profit from a customer, which can be determined by estimating the number of times a customer makes purchases and the average purchasing price.

Second is the cost to acquire a new customer, which can be determined by considering the expenses incurred on marketing and advertising. These figures might vary from company to company.

Customer acquisition ratio=net expected lifetime profit from a customer / cost to acquire a customer

Remember, if this ratio exceeds one, than you do not need to worry about your customer acquisition strategy, but if it falls below one then that is a sign that your spending on customer acquisition is only resulting in losses. A ratio of higher than one indicates that your investment is paying off well.

Key performance indicators (KPIs) give management a roadmap to take business decisions and explore ideas of improvement. if you or your account department do not monitor key numbers in your business, Especia can help you to drive key ratios and how to use them for business effectiveness. For more details please reach us at hgoyal@especia.co.in or 9310165114.

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