Every organization regardless of industry or size shares one thing in common – the need to maintain good financial control within the organization.
For sound business and leadership decisions to be made, it is not enough to be on top of the company´s income, expenses or budgets. Financial KPIs must also be monitored as it provides important insights into the company´s financial health and the overall performance of the finance function.
The most effective way to keep track of financial KPIs is through the setup of a financial KPI dashboard where you get a clear overview and comparison of the different metrics that matter to business operations.
Here are 15 financial KPIs that must be present in your KPI dashboard.
- Operating Cash flow
This financial KPI is calculated by adjusting net income from depreciation, inventory changes, and changes to accounts receivables.
This metric shows the amount of money that the operations generates. It gives decision makers a good idea of whether there is enough cash flow for planned growth or if external investors are needed.
- Current Ratio
A current ratio of less than 1 means that the business is incapable of meeting its financial obligations without additional cash flow.
This metric reflects the business´ability to pay its financial obligations in a period of 1 year. This financial KPI takes into consideration accounts receivables and accounts payables. It therefore has the ability to indicate whether or not a business has a healthy operating cycle.
Having a current ratio of more than 3 means that the company has too much assets and cash which means they are missing out on investment opportunities. A current ratio less than 1 means that the company is having difficulties paying their dues.
- Quick Ratio
This financial KPI does not take into consideration liquid assets. Instead, it just looks at whether or not the business has enough short-term assets to cover its near-future obligations.
- Gross Profit Margin
Gross Profit margin is one of the best indicators of a company´s financial health. It is basically that KPI that looks at the amount of money left of the revenue after deducting cost of goods sold.
This financial KPI tells you whether the business is still capable of paying its operating expenses and at the same time have enough money for the business to grow.
- Net Profit Margin
This financial metric is about looking at the company´s efficiency of generating profit against its revenue. Net Profit Margin is almost always calculated as a percentage so that it is easier to see how much profit there is per dollar generated.
- Current Accounts Receivables
A/R is how much money is owed to the company´s debtors. This metric estimates upcoming income, debtor days, and an estimate of how long its clients pay the business.
Having too high of this metric means that the business is not capable of dealing effectively with its long-term debtors.
- Current Accounts Payables
This metric is calculated by looking at all the obligations that need to be paid at a specific time period.
It looks at the amount of money that the business owes its suppliers or creditors. It can be segmented through business departments, divisions, projects in order to have a closer look at each of the obligation.
- Budget Line items
Line items help frontline leaders monitor expenditures. Line items signify projects, departments or other measures employed in order to have rigid control of spending.
A detailed budget makes a company agile in times of distress as it easily points to the decision makers where cuts can be made.
- Number of Budget Iterations
Budget iterations are basically the number of times a budget is changed before it gets approval. This is important as the more iterations there are, the longer it takes to plan and budget correctly.
This is also a good measurement of the finance department´s efficiency, accuracy and the leadership´s efficiency.
- Budget Variance
This financial KPI evaluates whether the company´s projections of expenses or revenue meets its expectations.
Low budget variance means that the actual expenses are lower than the projected ones or that the company´s revenue was higher than initially thought. In contrast, having too high budget variance shows over-optimism in forecasting or in general just poor leadership decisions.
- Budget Creation Cycle time
This financial KPI looks at the period of time needed to research, plan, discuss, and agree on a company´s budget.
Long budget cycle times are now frowned upon because it wastes valuable resources of the organization and it risks the output of the entire planning rendered irrelevant or outdated.
- Sales Growth
This financial KPI is the change in total sales generated for a certain timeframe. Through the sales growth, the percentage of current sales can be easily compared to preceding years.
- Payment Error rate
This financial KPI looks at how many incoming or outgoing payments were not completed due to a processing error. It can be because of poor documentation, lack of approval or missing references.
High payment error rate calls for a review of the company´s processing system.
- Finance Error report
This financial KPI displays the number of reports that needed further explanations or clarifications, those that had errors in them, those that need further investigation or those that required a revision.
This measures the finance function´s efficiency, effectivity, and accuracy in the performance of their duties.
- Total Cost of Financial Activities
This financial metric is the ratio of the total cost of the performance of financial activities in comparison to the revenue. This includes personnel costs, systems/technology, overhead, and other day to day expenses of the finance department.
Financial KPI and Metrics Management with Performance Canvas
Having gone through the important financial KPIs that must be present in your KPI dashboard, we hope that it is now clearer why there is a need to invest in a modern KPI technology that can help improve the finance department´s efficiency, effectivity, and accuracy.
Performance Canvas Financials is a complete and comprehensive FP&A solution that can be installed in as fast as 5 minutes. It also has a powerful dashboarding capability to ensure that you can effectively manage your KPIs. To know more about it visit www.performancecanvas.com or email [email protected].
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