In order to manage your business, it is necessary to be attentive and updated on a series of factors. To help in this matter, new methodologies have been emerging with the objective of optimizing the financial management of a company throughout the years. Financial KPIs constitute a few examples of that. Do you know what they are and which are the main ones that are in the market?
With the objective of clarifying this matter, we’ve made this article specially for you. We will start the text covering what financial KPIs are and the possibilities that they offer. Afterward, we will talk about the 7 main KPIs that exist. To conclude, we will briefly talk about how to calculate them. Keep up with us!
Get to know what financial KPIs are and the possibilities that they offer
KPI is an expression that stands for “Key Performance Indicator”. This indicator is used to measure, in an objective way, the development of the procedures that have been adopted in a company. The information gathered is used so that the objectives can be reached.
It is an indicator that is very much used by managers, since it enables the communication between the collaborators and the development of the company, even if the hierarchy levels are distinct. In this way, with the use of KPI, all the employees start to be involved in the mission and in the objectives of the corporation, aligning efforts for the procedures and strategies determined during the planning.
After all, KPI allows business development quantification, besides enabling the collaborators to understand how much their activities contribute towards the company’s success.
Check out which are the 7 main financial KPIs that exist
This is one of the most important KPIs for the financial management of a company. It indicates how much the organization is selling. It is worth highlighting the importance of being attentive to the measurement of these earnings since the invoiced amount not always corresponds to the earned amount.
This way, it is also important to monitor what has been planned and compare to the actions executed, that is, to compare the amount planned to the amount earned. Having this information in hand, you, as a manager, can adopt measures to maximize or minimize the deviations and contribute to reaching the determined objective.
The KPI for liquidity presents the capacity that a business can have to generate revenue in a short-term period. It is important in order to analyze if there is the possibility of meeting the commitments that are due in a tight deadline. As the main examples of financial assets with a high level of liquidity, we have the stock and the working capital.
If this index presents a low value, it may signify that the company is aiming the biggest part of its resources to investments in a long-term, what can be prejudicial for payments of debts in a short-term.
In case the index presents a high value, it is a signal that the money has been applied on stock or is stuck in the cashier, which is also harmful. The idea here would be creating a middle ground between both.
The index of rentability represents the level of return that the investment grants to the business. It is also very much used to analyze the viability of the project in creating enough revenue in order to justify the investment.
It is important to highlight that there is no pattern that may be considered satisfactory, but one that is adequate for each type of business. This occurs because rentability needs the conditions and characteristics of the investment.
4. Average ticket
This index represents the client’s behavior in relation to the brand and is also related to the client’s satisfaction with the company. In general, the KIP for the average ticket presents the average value that is spent on the demands. The higher the value is, the more is being spent.
Understanding the costs involved in the business is fundamental for good financial management. Having that, greater profitability is granted. This index contributes to identifying which are the needed business expenses to keep the company working. This way, it contributes to the manager to find an alternative to promote the elimination or the reduction of unnecessary expenses.
It is worth to highlight that good management of costs directly influences the price of the service or product, which has a direct influence on the competitiveness of the company in the market.
Profit is the objective of every company. In this way, profitability is an index that identifies the capacity of a business to generate profit. Thus, this KPI helps to understand what is the business’ risk. For instance, if there is a need for making big money for the profits to be regular, it is a signal that the risk for the business is high.
7. Debt level
Good financial management must measure the index of debts in a company. This indicator, as the name points out, is about the level of debts in an organization, providing information to the managers about the topic, who will analyze the best ways to improve the situation.
That is because, even if the business presents a good result, the payment of debts and interests may generate more spending than the profits earned, creating problems for the company.
Know how to calculate the financial KPI
The calculation of the financial KPI is directly related to the type of KPI that is being approached. Hence, for each one of them, a unique formula must be adopted. The Customer Acquisition Cost (CAC), for example, must be calculated by adding the costs of the sales and marketing teams and dividing it by the number of customers reached.
The average ticket must be calculated by dividing the total revenue by the number of demands. As for calculating the earnings, you simply add the total value that was sold in a month.
The calculation of the productivity must be done by dividing the net profit by the gross revenue and multiplying the quantity by 100. To calculate the KPI for debts, on the other hand, one must divide the total financial assets by the total liabilities and also multiply it by 100.
The rentability must be calculated by dividing the net profit by the total investment and multiplying it by 100. To conclude, to calculate the receipts, you must divide it in 4: current liquidity, dry liquidity, immediate liquidity, and general liquidity, in which:
- general liquidity : (current assets + doable in a long-term) ÷ (current liabilities + non-current liabilities);
- immediate liquidity: available ÷ current liabilities;
- dry liquidity: (current assets – stock) ÷ current liabilities;
- current liquidity: current assets ÷ current liabilities.
That being said, financial KPIs are extremely important for the management of a company and to help managers when making decisions in relation to the strategies and procedures adopted by the company.
With its insertion in the management, administrating the business becomes more professional and rational, adopting measures that are based on concrete facts and not on intuition. Currently, there are various types of software and applications in the market to manage, develop the indexes and calculate the financial KPIs. Have technology working for you as well at this moment!
Did you enjoy this text that we have prepared about the most important financial KPIs for your business? So, read our other article in which we approach how the ERP reports help the financial management of the company!