What are Financial KPIs?
Financial KPIs are measurable values used by Finance Teams to measure and track their progress on specific business objectives. Further, these KPIs help determine how well finance teams are performing.
We've been compiling a whole bunch of KPI examples as part of our KPI examples mini-series. This post is a small supplement to that series, which provides 12 of the most common financial KPIs, we also include a brief description of why you may want to use each.
We suggest you pick at least 2 KPIs for each of your key business objectives. If you'd like to start writing your own KPIs, check out our guide: How to Write KPIs - 4 Step Approach.
We've decided to kick things off with some of the most important examples of KPIs for running your business.
Those that relate to your financial performance. Whether you're a dedicated finance team or not, these financial KPIs are critical to measuring the success of your business.
So here are our 12 Financial KPI examples! we believe these are the 12 key metrics you should be tracking.
Financial KPIs for Understanding your Profitability
These examples of KPIs are for helping you to understand how well your business is performing in terms of profitability. This can help you benchmark both internally and externally as well as help you to set growth targets over time.
Financial KPIs: Gross Profit Margin
Expresses your profits as a percentage of total sales revenues generated. Therefore, it gives you a high-level view of how much profit you're making.
Although, it doesn't factor in all expenses so shouldn't be used for detailed decision-making. It is however useful for bench-marking your performance over time or comparing your profitability to another similar company.
Financial KPIs: Net Profit Margin
NPM is the percentage of revenue remaining after operating expenses, interest and taxes have been deducted from total revenue. This gives a more accurate internal figure for understanding profit but is less useful for comparisons outside of your company.
Financial KPIs: Monthly Recurring Revenue (MRR)
Monthly recurring revenue is a very popular metric for SaaS companies such as ourselves. This metric looks only at the revenue generated each month which will re-occur with little to no additional investment required. For example, any customer who signs up to a recurring monthly subscription to Cascade increases our MRR.
Financial KPIs: Return on Equity (ROE)
Measures your net income against each unit of shareholder equity. Return on equity ratio not only provides a measure of your organization’s profitability but also its efficiency. Less useful for startups, but an important KPI for established organizations.
Financial KPIs for Understanding your Liquidity
Being profitable is key, but if you're not able to pay your debts or stay liquid, you won't be around for long. These examples of finance KPIs will help do that.
Financial KPIs: Current Ratio
Current Ratio weights your assets, such as accounts receivables, against your current liabilities, including accounts payable. The KPI is used to help you understand the solvency of your business.
Financial KPIs: Accounts Receivable Turnover
Accounts receivable turnover shows you the rate at which you are collecting what is owed to you by customers. So, to calculate the KPI, take total earnings in a given period against your average accounts receivable for the same period.
It's best to monitor this over time so you can use it as an early warning system. It will help you identify customers starting to take longer and longer to pay. If this happens, it will impact your own liquidity soon enough.
Financial KPIs: Runway & Burn Rate
These two simple KPIs work conjointly to help you understand how much time you have for survival in the worst-case example of sales stopping completely.
Simply calculate how much money you're are spending each month - this is your burn rate, then divide the total amount of cash you have available by this figure, to give you your runway in months.
Financial KPIs for Understanding your efficiency
If you're profitable and liquid, you've already passed some of the hardest tests in business. Now it's time to start measuring your efficiency as a business and trying to find opportunities to improve, which in turn will improve your profitability and overall stability.
Financial KPIs: Revenue per FTE
Employee costs usually make up the bulk of a company's expenses, therefore it's often useful to measure how much revenue you are actually generating for each employee in your company.
This gives you an idea of whether or not you're making an appropriate amount of revenue for the size of your business.
Financial KPIs: Revenue per Customer
This gives you an idea of how much gross revenue you make per customer. How you calculate this will vary depending on the type of business.
For that reason, we as a SaaS business look at the Life Time Value of a customer (LTV) based on what they pay in their subscription and how long a subscription typically lasts. If you were coffee shop you might instead look at the average spend in a visit.
Financial KPIs: Revenue Growth Rate
This KPI helps to ensure your business continues to grow at a target rate, measured by a percentage. Therefore, you would measure this monthly or on a 12 month rolling average basis.
Financial KPIs: Cash Conversion Cycle
Measures the time it takes to convert an investment in inventory or some other resource input into cash. This gives you an understanding of how long cash is tied up in inventory before the inventory is sold and cash is collected from customers.
Financial KPIs: Asset Turnover Ratio
This measures a company's ability to generate sales from its assets by comparing net sales with average total assets. For example, a ratio of .5 would mean that each dollar of assets generates 50 cents of sales.