Article

Analytics, Managed Accounting

The Role of Financial KPIs: Tracking Performance for Business Success

Posted on April 15, 2024

By Beth Mickelson

May 22, 2024

Key performance indicators or KPIs are essential for evaluating a company’s success. The role of financial KPIs is to provide the statistical data of various facets of a company. But there are many key performance indicators, so much so that keeping track of them all can become a hassle. So many people find it confusing to figure out what to focus on.

There are key performance indicators for virtually all aspects of a business. And all indicators do not have equal importance for every business. The priority of KPIs changes based on the nature of your relevant industry. In this article, we will talk about financial KPIs and how to use them to improve business performance.

Identifying Financial KPIs for Business Performance

There are several notable metrics for determining the financial performance of a company. We can collectively call them the financial KPIs. Financial KPIs are universal statistics that all businesses need to keep track of, regardless of the industry. Here are some of the most important KPIs worth focusing on:

1. Working Capital

Working capital remains one of the most crucial performance indicators because it determines the boundaries of a business. It is the foundation upon which all the projected goals and future growth estimates stand upon.

You can ascertain the working capital by subtracting the total liabilities of a business from its total assets. Understanding the working capital is one of the fundamental aspects of business management.

The capital determines whether you need to strategize aggressively or take fewer risks. Capital is the lifeblood of a business, as it directly controls the scope of operation of any company.

2. Operating Cash Flow

Operating cash flow is like a liquidity indicator. It’s the most common metric used for determining the financial health of a business. Operating cash flow represents the total cash a company generates through various operations.

One can check whether a company can generate enough positive cash flow to justify its capital investment. Experts use it as a premier benchmark for determining a company’s financial success since it indicates a business’s ability to generate cash.

3. Revenue Concentration

Revenue concentration is where KPI data analysis truly shows its worth. One of the highest priority financial KPIs, this helps identify the revenue allocation of a business. It’s an indicator that lets you identify your revenue source. You can use that data to change your business strategies in real time.

For a small business, you can always have an approximate idea of where your revenue goes. However, doing the same for a large business is impossible without the help of professional analysts keeping track of the revenue concentration.

4. Inventory Turnover Ratio

In layman’s terms, the inventory turnover ratio signifies the time it takes, on average, for a business to sell its inventory. Such data is significantly valuable for a business because it determines how often you need to restock your inventory to maintain an optimal business operation.

Strictly speaking, the inventory turnover ratio measures the efficiency of a business in utilizing its resources for the most profit. You can then compare it to similar companies and competitors to understand your position in the market. This KPI is particularly crucial for businesses in the fast-moving goods industries where efficiency is the key.

5. Accounts Payable Turnover Ratio

The accounts payable turnover ratio shows the rate at which a business pays off its supplier. It is one of the most helpful financial KPIs to keep track of because it can help you check multiple financial aspects of a company.

If the turnover ratio is low, that indicates the company is struggling to pay off its suppliers on time. That’s a stain on the company’s track record. Such situations can lead to future complications if left unresolved. Investors generally find such companies unappealing.

A high turnover rate indicates that a company is paying its suppliers frequently. That is usually a good thing, much better than being behind in payments. However, having too high a ratio is not good either because that indicates that the company may be missing out on opportunities to use its funds in more meaningful ways.

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How to Set Financial KPI Goals

Financial KPIs mean nothing unless you compare them against your business goals. It is a tool for checking how well a business performs against strategic predictions. So, you need to have a set of viable goals first to glean any meaningful utility out of KPI analysis.

There are several ways to set achievable goals for your KPI. You can set absolute goals or even comparative goals. For example, setting your goal for an exact number is an absolute goal. Strategies built on absolute goals are harder to adjust in emergencies, but they are also easier to follow through.

Comparative goals are more flexible and require more real-time data analysis to get right. Comparative goals rely on external benchmarks, like setting a goal to surpass a competitor.

Using Financial KPIs to Drive Strategic Decision-Making

The foundation of a successful business strategy relies on having a concrete understanding of a business’s overall situation and knowing its strategic goals. KPI data analysis is one of the most efficient ways of monitoring those benchmarks.

Key performance Indicators help higher-ups manage the business from a macro level. You can distill the operational details of a business down to condensed statistical data by using financial KPIs. That data can then help the higher-ups get a clear understanding of the company. KPIs monitor data in real-time, which is crucial for adapting to changing market situations. Any competent business owner must utilize such data for growing their business. Having a good handle on this data also provides a considerable edge against competitors in any industry.

Conclusion

Hopefully, this article helped you understand the role of financial KPIs and how analyzing it can help your business. If you want to use the latest analytic tools to keep track of your business’s KPI then feel free to contact us.

Steve Solt headshot

Beth is the accounting team lead at KDG. With over 20 years of experience managing and directing accounting departments for a variety of organizations, Beth brings a wealth of expertise. Among them: a leading nonprofit organization, a $12 million restaurant franchise, and an international manufacturer.

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