The Key Financial Metrics To Understand The Health Of Your Business

Financial performance metrics are the leading indicators of your company’s fiscal health, and under no circumstances should they be overlooked. When running your business, you want to be in control of your finances and accurately determine if your business is making sound financial decisions. The best way of doing this is by keeping a close eye on your financial key performance indicators (KPIs).

What Is A Financial KPI?

Financial KPIs are a subcategory of business KPIs that specifically focus on financial data and the monetary value of your business. Financial KPIs are designed to help you understand your business’ overall financial standing, as well as provide insight into specific aspects of your finances, such as efficiency and profitability. An end-to-end financial KPI dashboard is an easy way to stay on top of your finances. It provides a straightforward and effective way to gain valuable insights into your financial data and regularly monitor your financial performance in a given period. The metrics, such as gross profit margin and return on sales, will help you understand how successful or unsuccessful your business is in meeting its goals and objectives.

Why Do Financial KPIs Matter?

One of the key differences between “good” business owners and “bad” ones is their ability to understand the financial health of their business. That means companies assessing and tracking their financial performance on a regular basis can make necessary changes based on the data-driven, valuable insights offered by the metrics. With a financial KPI dashboard, you can:

• See how well your company is performing compared to its goals and plans.
• Gain valuable insights into the weaknesses and strengths of your business performance.
• Figure out the best way to allocate resources for maximum impact.
• Discover which areas of your business need improvement and how to get started.
• Make better informed financial decisions and predict future cash flow requirements.

Top 5 Financial KPIs You Must Track to Improve Your Company’s Health & Performance

Here, we look at the key financial metrics you need to track to understand the health of your business. This will help you make necessary changes and educated decisions about where and how you should focus your efforts.

1.    Gross Profit Margin

This is the number one financial KPI every business must track. Gross profit margin (sometimes called gross profit ratio) measures how much revenue you have left after deducting the cost to make your product or deliver your service. When you sell a product, the cost of goods sold (COGS), or cost of sales, is deducted from revenue to calculate the gross profit. The higher this number, the better the margin. It’s calculated by dividing gross profit by total revenue and multiplying that number by 100%. Gross Profit Margin = (Revenue – Expenses of Goods Sold) / Revenue x 100% For example, if your company sells $100,000 worth of products and it costs $50,000 to buy those products from a supplier, your gross profit margin would be 50%. In other words, for every dollar sold in revenue, 50 cents is left over after COGS is deducted. Takeaway: “A high gross profit margin means that your company sells products or services for more than it costs to make them.”

2.    Net Profit Margin

Net profit margin measures a company’s overall profitability by dividing net income by total revenue. Net income is calculated by taking into account all revenues and subtracting all expenses, including the cost of goods sold (COGS), operating expenses, and taxes. Net income can also be called net profit or bottom line. If you want to know how much of each dollar in sales ends up as actual profits, the net profit margin is the best financial metric to measure. Takeaway: “A higher net profit margin indicates that your business is generating more profits for every dollar in sales.”

3.    Return on Sales (ROS)/Operating Margin

Return on sales (ROS), also called the operating income ratio, is a good indicator of whether your company is producing enough income to cover its operating costs. The operating margin is calculated by taking operating income (gross profit minus operating expenses) and dividing it by total revenue. Takeaway: “The higher your ROS is, the better your company is at turning sales into profits.”

4.    Operating Cash Flow (OCF)

Cash flow is the lifeblood of your business. Your company may be profitable, but it’s not healthy if it doesn’t have enough cash to meet its obligations and fund growth. This KPI measures the cash generated by a business before accounting for debt service, capital expenditures, and dividends. It is what is leftover after paying all operating expenses and taxes. Using a robust financial KPI dashboard to monitor this metric ensures that your business has sufficient funds to meet its day-to-day needs or cover future expansions. Operating cash flow = Net income + Non-cash expenses – Change in net working capital. Takeaway: “A high OCF indicates good liquidity levels as well as strong business operations and profitability.”

5.    Current Ratio

The current ratio is a liquidity ratio of a business, calculated by dividing current assets by current liabilities. This ratio tells you if your company has enough liquid assets to cover its short-term liabilities or a large purchase. A ratio over 1% indicates that a business can pay off its obligations in the short-term. On the other hand, a ratio below 1% means that a company doesn’t have enough cash to cover its liabilities in the short-term. Takeaway: “Generally speaking, a higher current ratio indicates a more liquid (healthy) company while a lower current ratio indicates an illiquid company.” Financial KPIs are an excellent way to track your company’s overall financial progress against goals. By monitoring the metrics mentioned above with a financial KPI dashboard, you can gauge your finances, make data-driven financial decisions, and forecast future growth for your company. As a leading innovator of Financial Planning & Analysis software, Synoptix provides multiple what-if scenarios and depicts the impact throughout the system all the way to the KPIs.  The team from Synoptix would love to walk you through the process. Visit us online today or call at 801-254-4503 for more information. We also specialize in budgeting solutions, financial reporting services, and more.