Finance KPIs

Finance KPIs are values that can help you estimate how well your company is achieving your financial goals. It gives you a peek into the financial health, assets and expenses, and cash flow of past and present. These financial KPIs are crucial to measure your business revenue and profitability over time.

By gauging current performance, CFOs and business owners could set realistic growth targets for upcoming periods, control costs, and spend resources on necessary areas.

Important finance KPIs to measure

Nine finance KPIs that every CFO should track:

1. Gross profit margin

One of the crucial financial metrics is gross profit margin, which equals the value of net sales minus the value of goods sold. This shows the % of profit you have achieved more than the goods selling cost. A high gross profit margin indicates that your pricing strategies are optimal and are working. 

A decent gross profit margin would lie anywhere in-between 5 to 40%. Businesses often use gross profit margin to evaluate product-specific profitability.

2. Net profit margin

Net profit margin is the measure of net profit minus all operative expenses, interests, taxes, and other costs. 

The difference between gross profit and net profit margin is that gross profit shows the relationship between profits and pricing while net profit shows the overall profitability. By tracking net profit margin, you could find ways to control expenses, diversify revenue streams, and improve overall profitability. 

3. Inventory turnover

Inventory turnover is the measure of how fast your inventory gets sold and replaced over a given period of time. A high inventory turnover ratio means your products are getting sold faster, denoting a decent cash flow. But it also hints that your inventory replenishment must be proactive to avoid stockouts. On the other hand, low inventory turnover means that your products aren’t moving off the shelves. By tracking inventory turnover, a business could understand their cash flow cycle and see how much cash is trapped due to unsold inventory. 

4. Acid-test ratio 

Put your business financial health and liquidity into a test by assessing quick ratio or acid-test ratio. Acid-test ratio compares your most-liquefiable assets to quick liabilities and your business’ ability to meet and pay bills as they arrive. By current assets, we mean assets that you could liquify within one quarter. Example: cash in bank accounts and other cash equivalents. 

5. Current ratio

Current ratio is current assets divided by current liabilities. While quick ratio and current ratio both assess the ability to repay short-term liabilities, current ratio isn’t stringent like the quick ratio. Current ratio lets you include more than immediate cash assets. To measure current ratio, you could also consider account receivables and any marketable securities, along with cash equivalents.

6. Cash conversion cycle

Cash conversion cycle is measured in days on how long it takes from converting your inventory to cash. It traces the journey of cash throughout its cycle from accounts payable to accounts receivable. A short or decent CCC shows that your business resources aren’t tied up in accounts receivable, meaning that their finance management is good. 

7. Working capital

Working capital or net working capital is the total amount of current assets minus its liabilities, accounts receivables, and other accrued expenses. Here, current assets mean the cash and cash equivalents that can be converted into cash in one year. Working capital is a broad financial term that finance teams use to measure business liquidity. A business with positive working capital means it can manage its expenses with existing capital. 

8. Return on investment (ROI)

ROI is another broad financial measure to find out how well your investments are paying off. The finance teams evaluate the return on investment (ROI) for each project or investment to determine its effectiveness and decide whether to continue or not. Tracking ROI helps the team make smart resource allocations and investment decisions that maximize outcomes.

9. Debt-to-equity ratio

Find out your company’s financial leverage and solvency using the debt-to-equity ratio. This is a measure that evaluates a company’s shareholder equity against its liabilities. A high debt-to-equity ratio poses a risk to the financial health, indicating greater dependency on debts over equity shares. 

Track finance KPIs using CFO and finance dashboards

We have only picked 9 essential KPIs for finance teams reporting here. But, there is more to it and it depends on the company's structure, financial habits, spending goals, debts and liabilities, etc. 

And, every finance KPI requires data from accounting systems, cash flow statements, balance sheets, income statements, annual reports, and tax files. 

The best way to avoid the cumbersome data integration and aggregation is to use interactive, near-real-time finance dashboards.

A finance dashboard is a visual representation of your business financial data - with interactive charts and clickable graphs. It not only shows the numbers, but highlights trends that one could easily miss.

Since every company’s requirements are different, it’s best to consult with data and subject experts to find what financial metrics to track.

Schedule a demo call with us to see how dashboards and visualizations could transform your finance reporting, removing complexities out of it.