Perhaps you’ve reached a point where you’re happy with where things are with your business and want to expand. The first thing that may come into mind is where to begin?
First, to develop and scale, you’ll require financial data. A different scenario would be checking how effective your business strategy is in helping you achieve your goals. Analyzing your financial data can assist you in deciding if your plan needs to be updated.
Financial KPIs are crucial to helping you analyze your business strategy and help business leaders arrive at making strategic decisions that matter.
Financial KPIs for business strategy
It would help if you tracked financial KPIs to inform your strategy, whatever your business goals. Other financial KPIs may be applicable.
Note how to use data for each financial KPI. This helps you distinguish between good and poor results and how they may alter your business plan.
Sales growth is an essential factor in your business’s health. By tracking sales growth, you can determine which components of your strategy are working and which aren’t.
The Sales growth formula can be calculated as Current Net Sales – Previous Net Sales / Previous Net Sales) x 100
The most profitable clients, customers, and projects often make the best use of their time, energy, and resources. Revenue concentration is another KPI your organization must measure as it shows what proportion of total revenue each client or project contributes. Using this KPI, you may calculate client ROI.
Analyzing revenue streams helps calculate revenue concentration. Financial software like Performance Canvas gives you an easy-to-use dashboard that provides an at-a-glance overview of your income streams, making client or service analysis straightforward.
You may assess revenue concentration by knowing how much each client, project, or service brings in.
Revenue concentration formula:
(Revenue by Customer or Project/Total Revenue) x 100
Net Profit Margin
Profitability is key to a company’s financial health. Long-term business success requires profit.
While gross and operating profit margins might be helpful, the net profit margin is essential.
Profit after expenses is your net profit margin. This comprises operating and non-operating costs (like taxes and debt payments).
Net profit margin shows how profitable you are strategically. Your business must be lucrative.
Net profit margin formula:
(Net Income/Revenue) x 100 = Net Profit Margin
Simply put, a positive net profit margin means profit. You can do nothing or change your plan to boost profits. A negative net profit margin indicates a losing firm. To increase your net profit margin, rethink your business plan. That could mean decreasing costs, boosting rates, and getting more or better clients.
Accounts Receivable turnover
Customers that pay late (or not at all) might affect your finances.
Accounts receivable turnover (debtor’s ratio) is a critical KPI. It gauges how quickly clients pay invoices (for example, net 30 or net 60).
The annual turnover formula is:
Creditors Net annual credit sales average A/R
Net credit sales are any sums not paid upfront in cash. For a project-based firm, this is the payment for the completed jobless any retainer or fees paid at the outset.
Calculate your average accounts receivable. So:
(Starting + Finishing AR) /2
The accounts receivable turnover ratio displays how often your AR turned over during the period.
By dividing 365 days by the number of times per year your AR turns over, you may determine how long it takes on average to get money.
Higher AR turnover means fewer past-due invoices and greater cash flow. It can also signify a smooth payment transaction.
This KPI doesn’t always favor what’s lower. Your firm may be OK with 15 or 30-day payments, and providing clients time to pay may help retain customers. So long as your clients pay within that timeframe, everything is OK.
If your AR turnover is poor and clients take too long to pay, you may face cash flow concerns. Examine your invoice payment conditions, try new payment methods, or take other steps to get paid sooner.
Working Capital Ratio
To operate, a firm needs funds. Working capital helps you meet short-term financial obligations and run your business.
Having a better understanding of your working capital ratio will help you plan strategic movements like the need to add new team members or investing in new equipment. It will also tell you when your business needs finance.
Calculate working capital by comparing current assets to liabilities. Working capital formula:
Working capital=current assets minus current liabilities
Positive working capital indicates enough money to cover your outstanding debt and some extra cash. When obligations exceed assets, negative working capital occurs. That means you won’t be able to pay your bills.
Positive and negative working capital can reveal critical information about your firm and strategy. If your working capital is significant (assets > liabilities), you’re not investing enough in your business. In that case, you can employ working capital to expand or target new clients.
Negative working capital means you can’t meet your costs. You’ll need to focus on bringing in more capital by getting a loan or raising prices.
Drive Business Strategy using Performance Canvas Financial KPIs
It would help if you understood the critical financial metrics to follow for long-term financial health, how to calculate them, and what they reveal about your business plan.
When used appropriately, financial KPIs can help you reach corporate goals. These insights will help your firm expand faster and more effectively.
Financial KPIs help Chief Financial Officers (CFOs) make intelligent financial decisions throughout the year. We recommend a financial budgeting software like Performance Canvas that gives you all the tools and features you’ll need to help your business succeed this year.
Performance Canvas Financials is a complete budgeting and planning program that saves your organization time when it comes to budgeting, forecasting and planning for the future. PCF is also the best platform to use if you want to cut in half the time it takes your team to budget and plan while making their day-to-day tasks more manageable.