Thus, the analysis of these parameters should be part of the routine of managers and coordinators in the financial area. Although each organization has its particularities, there are KPIs that are essential for any business.
With that in mind, in this post you will learn about the top 5 financial KPIs to monitor in your company and you will understand the importance of considering them in your corporate routine.
What are financial KPIs and why track them?
Before knowing the 5 main financial KPIs , it is interesting to understand the concept and its importance. This is the acronym for key performance indicators.
It is a set of metrics used with the objective of measuring the results of actions and strategies adopted by a fundamental sector for the company. In this sense, KPIs can be logistical, marketing and human resources, for example.
There are also financial KPIs — the focus of this content. They are used to analyze the data related to that area. In other words, these are indicators that measure costs, revenues, profits and losses, among other important aspects for the sector and for the business as a whole.
Based on this information, the manager can make an accurate diagnosis of the current financial situation of the business. With this, it is possible to identify problems and make the necessary interventions efficiently and faster.
Furthermore, with KPIs, it becomes easier to project future scenarios and draw up a contingency plan. So it is possible to avoid the occurrence of events that could harm the company’s finances and compromise its operation.
5 financial KPIs to monitor in your company
As you can see, KPIs are fundamental for any sector — including finance. However, there are a variety of indicators that can be used within a company. Therefore, it is necessary to know which ones are essential for good management in medium and large organizations.
Next, you will find 5 of the main financial KPIs to monitor in the company Check it out!
Billing is one of the most important KPIs for the financial sector. After all, it represents a company’s gross revenue. Through it, the manager is able to monitor the performance of sales made within a period — which can be monthly, bimonthly, semi-annually or annually.
The billing calculation is very simple, as it is enough to add the total value of sales for the period to be considered. It is also possible to analyze earnings according to distribution channels and even according to products or services. Thus, there is a way to identify which one brings the best results for the company.
Another relevant financial KPI is profitability, which reveals how much is actually left in cash after paying all business costs and expenses. In this way, it is feasible to know if the company has resources to distribute to partners or invest in its growth, for example.
In addition, profitability helps measure operational efficiency. This is because, when comparing it with billing, it is possible to analyze whether expenses are high or not. From this observation, management can devise a plan to reduce costs and thus increase the company’s profits.
The formula for figuring out profitability is this:
Net income = gross income – costs and expenses – taxes
To find the profitability ratio, divide net income by gross revenue. To get the result in percentage, you must multiply the value obtained by 100.
Indebtedness is also one of the main financial performance indicators. It shows the level of debts assumed by the company, whether with financial institutions, commercial partners, suppliers, among other creditors.
Therefore, the indicator can reveal financial problems that, if ignored, could compromise the operation and growth of a business. Thus, it is essential that the manager discovers the reason for the debt and seeks solutions to resolve it.
To calculate this KPI, simply divide the company’s total liabilities by its total assets. Remembering that the first term refers to the commitments and financial obligations of an organization. The second represents the assets and rights that she has – such as accounts receivable.
This financial KPI reveals a company’s ability to generate cash to meet short-term commitments. So the indicator can show the possibility of default by the organization, in case of low liquidity.
On the other hand, if liquidity is high, it may indicate that the cashier has a lot of cash stopped or turned into inventory. Given this, it may be interesting to analyze the feasibility of investing this amount in investments that offer a potential return, for example.
The calculation of a company’s liquidity is given by current assets divided by current liabilities, with maturity in up to 12 months. So, by following it, therefore, you will know whether the company has enough capital to pay its debts or not.
5. Break-even point
One more of the financial KPIs to monitor in a medium or large company is the break-even point. It indicates the moment when income and expenses cancel each other out. Therefore, the indicator shows how much the business needs to sell to meet all its commitments and then start making a profit.
To obtain the break-even point, it is necessary to apply the following formula:
Break-even point = fixed costs and expenses / contribution margin percentage
Fixed costs and expenses are expenses whose values do not change according to the volume produced or sold. This is the case of machine rental and employee payroll, for example.
The contribution margin is the gross profit from the sale of products or services. It is given by the difference between total revenue and variable expenses. To get the result as a percentage, just multiply it by 100.
In this content, you could learn about the 5 most relevant financial KPIs for medium and large companies and see how they work. By considering these indicators, therefore, it is possible to monitor the finances of the business and achieve increasingly effective management!