There are thousands of Key Performance Indicators (KPIs) to choose from and perhaps the challenge of many companies and managers today is that many collect a huge number of KPIs that are easy to measure manually or by using a KPI management software and therefore, in the end they sit with so much data but very little critical business insights.
It is important to understand that companies that measure and reward specific KPI which are not at all in line with their goals will basically end up making the wrong business decisions. KPIs must always be in line with the overall strategic plans and objectives of the company. After all, what is the use of steering when one doesn’t know where to go?
KPIs must be used only as an instrument to check whether or not a specific individual or company is on the right course.
Every business is different and so KPIs must be tailored to fit the needs and objectives of the company. However, as a general rule, there are KPIs that must be in place in order to measure financial health and performance management.
In order to measure the financial performance of a business, here are some of the KPIs that can help.
- Net Profit Margin
Net profit margin measures a company’s profitability in terms of how much a company earns from every sale it closes. This KPI also acts as a gauge of the company’s control on operating costs. To measure this, revenue – cost of goods – operating expenses – other expenses – interest – taxes / revenue.
This is important because increased revenue does not always equate to increased profitability but understanding this KPI ensures that the business is in a better position to control its costs and make effective sales plans.
- Gross Profit Margin
Gross profit margin is a financial metric used to assess a company´s financial health and business model by showcasing the proportion of money left from revenue after accounting for the cost of goods sold. This is measured by dividing gross profit by revenues.
This is an important KPI because without adequate gross margin, a company cannot pay for its operating expenses. This is also important as it is used to compare business models with competitors. More effective companies see a higher profit margin.
- Operational Profit Margin
Operating profit margin shows how good a company is at controlling costs. The proportion is the amount of money left over after deducting variable expenses to pay off fixed expenses. To calculate operating profit margin, the manager needs operating income and net sales or revenue.
This is important as it can be used to gauge how efficiently a company is operating, or how profitable it is. At the same time, it helps investors take a closer look at the company by using it to analyze projects within the company.
EBITDA stands for earnings before interest, taxes, depreciation and amortization. This is used as a proxy for the earning potential of the company. It also strips out costs of debt capital and its tax effects by adding interest and taxes to earnings.
This is important as it can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. EBITDA is often used in valuation ratios and compared to enterprise value and revenue.
- Revenue Growth Rate
Revenue growth shows sales increases/decreases over time. It is used to measure how fast a business is growing. This helps investors identify trends in order to gauge revenue growth over time.
Is there anything in this list that is missing that you think is very critical in assessing the financial health of the company? How does your KPI dashboard look like today? What do you think about adopting a KPI tracking solution?
What would you like to do next?