The Top Financial KPIs To Monitor for Your Business

May 21, 2024
small business owners looking at financial kpis

As a business owner, you’re the captain of your ship. And like any good captain, you need navigation tools to steer your company in the right direction. That’s where financial key performance indicators (KPIs) come in.

Financial KPIs provide useful information about your financial situation. They help you see how well you’re doing, spot trends, and make smart choices. And by keeping a watchful eye on them, you can chart a course for success and avoid choppy waters.

What Are Financial KPIs?

Financial KPIs help you understand the state of your business’s financial resources. These resources might include liquid cash or assets. KPIs give insights into your ability to make a profit, pay bills, and use money wisely. But their main purpose is to show how close you are to reaching your goals. 

So, which financial KPIs should you track? It depends on the type of business, the industry, and your goals. Choose some that match your main objectives and expand from there. For example, if your goal is to increase profits, track your gross profit margin as a KPI. If it’s lower than your goal, you can find ways to boost it.

You should also track non-financial KPIs, which are the areas of performance you want to track that don’t relate to finances. Examples include customer satisfaction scores and employee retention rates. These can help you track how your business is doing as a whole.

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The Importance of Financial KPIs for Businesses

kpi graph

KPIs show you where your company is doing well and where there’s room for improvement. By keeping a close eye on them, you can spot problems early and take steps to fix them. If you notice profits are declining, you can look for ways to cut costs or increase revenue. If your KPIs show that your business is doing well, you can feel confident about making plans to expand.

Financial KPIs are also important because they help you reach objectives. They’re measurable ways to track how close you are to reaching your goals. And when you’re always collecting information about your progress, it’s easier to set realistic goals and make smart decisions. 

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12 of the Best Financial KPIs

Now that you know why financial KPIs are so important, let’s look at some of the best ones to track. While your final list depends on your specific needs, these examples offer good places to start.

For Profitability

Want to boost profits? These KPIs track incoming money in different ways so you can spot ways to improve.

  1. Gross Profit Margin. This margin looks at your profits after subtracting the cost of goods sold (COGS) but before paying operating expenses, interest, and taxes. A high gross profit margin means you control production costs well.
  2. Net Profit Margin. If you want to know how much profit you keep from every dollar you earn after subtracting all expenses, track this KPI. Those expenses include COGS, operating costs, interest, and taxes. The higher your net profit margin, the more profitable your business is overall.

For Liquidity

When you know the state of your assets, you can see how best to use them. Here are some KPIs that track capital, debt, and other important numbers.

  1. Current Ratio. The current ratio shows whether you have enough assets to pay off your current liabilities. A ratio above 1 shows that your company has more assets than liabilities, which is a good sign.
  2. Quick Ratio. Measure whether you have enough liquid assets to cover your current liabilities with a quick ratio. Assets are liquid if you can quickly turn them into cash. The quick ratio is like the current ratio, but it excludes inventory and other less liquid assets. This gives a more conservative estimate of your company’s financial position. As with the current ratio, aim for 1 or higher.
  3. Debt-To-Equity Ratio. This ratio compares your company’s debt to its equity (the money invested by owners or shareholders). A lower ratio means your company has less debt than equity, which is a sign of financial health.
  4. Working Capital. This KPI shows how much money you have available for day-to-day operations.
  5. Accounts Receivable Turnover. How fast your business collects payments from customers is your accounts receivable turnover. A higher ratio shows that you collect payments efficiently, which improves cash flow.
  6. Accounts Payable Turnover. This shows how quickly your company pays off its short-term debts to suppliers and creditors. A higher ratio suggests that you’re managing your short-term debts well. This maintains good relationships with suppliers.

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For Efficiency

Your business can always be more efficient. These KPIs show how you’re doing in terms of labor, speed, and customer satisfaction.

  1. Customer Lifetime Value (CLV). This number tells you how much money each of your customers brings in on average. It can help you find ways to boost customer value.
  2. Revenue Per Employee. This shows how much revenue each employee generates. A higher number suggests your team is working efficiently.
  3. Revenue Growth Rate. How much your revenue has grown over a certain period is known as your revenue growth rate. Monitoring your growth rate helps you see if your business is expanding or contracting.
  4. Asset Turnover Ratio. This ratio indicates how well you use assets to generate revenue. It measures the amount of sales or revenue generated per dollar of assets. A higher turnover ratio means you make good use of your assets.

Choosing the Best Financial KPIs for Your Business

smal business owners tracking finances kpis

With so many KPIs to choose from, it can be tough to know which ones are right for your business. Focus on the ones that match your company’s unique goals and day-to-day operations for the most success.

A small startup focused on scaling up might pay closer attention to revenue growth rate and customer acquisition costs. But a bigger company might prefer profitability metrics like net profit margin. Each business has different values and, therefore, different KPIs.

Your business model also plays a major role in determining which KPIs to track. A subscription-based software company likely wants to track metrics like monthly recurring revenue. But a retail store might focus more on average transaction value and inventory turnover.

There’s no one-size-fits-all approach to selecting financial KPIs. By understanding your company’s unique needs and priorities, you can pick the ones that offer the most meaningful insights.

6 Questions To Help You Find the Best Financial KPIs for Your Business

With so many numbers and systems out there, how do you choose from the less common financial KPIs?

Taking the time to answer these questions can guide your decision-making:

  1. As a business, what are our top goals and priorities? Which KPIs will best measure our progress toward them?
  2. What is our business model, and which KPIs are most relevant to how we generate revenue and profit?
  3. What are our most important operating processes? Which KPIs can assess their efficiency?
  4. What are our biggest financial challenges or concerns, and which KPIs will help us keep tabs on those areas?
  5. Who’s responsible for monitoring and reporting on our financial KPIs, and how often should we review them?
  6. What benchmarks or targets will we set for each KPI? How will we decide if we meet, exceed, or fall short of those targets?

Tracking your financial KPIs is an ongoing process, not a one-time task. As your business evolves and your goals shift, your KPIs may need to change as well. Stay flexible and regularly review your metrics. That way, you always focus on the numbers that matter most.

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How To Set and Monitor Your Financial KPIs and Metrics

small business owner setting financial kpis

Once you’ve settled on which financial KPIs to track, you need to monitor them effectively.

One of the best ways to track your financial KPIs is to use dedicated financial management software. These tools pull data from your financial accounts and present it in simple KPI dashboards and reports. This saves you time and gives you the most current numbers.

This type of software also lets you set up custom alerts that tell you when KPIs fall outside your desired range. For example, you might set an alert if your quick ratio drops below 1. This is important information because it could show you have trouble paying short-term debts.

But along with using software, it’s a good idea to schedule regular check-ins with your team to review your KPIs. This could take the form of a weekly or monthly meeting where you discuss the numbers and your goals. You can also use this time to brainstorm ways to improve your financial performance.

Business Expense Tracker

You can’t track KPIs effectively without tracking your spending. Invoice Simple‘s business expense and receipt tracker lets you scan any receipt, and it captures key info right away. All of your expense data is ready to export into a summary report whenever you need it.

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