Key Performance Indicators (KPIs) are the vital navigation instruments used by managers to understand whether their business is on a successful voyage or whether it is veering off the prosperous path. The problem is that there are thousands of financial and non-financial metrics out there and most managers struggle to find the few vital ones that really matter.
Here I want to look at financial KPIs and share with you five key metrics I believe are vital indicators of financial health:
- Net Profit – business exist to make money. Net profit is basically a measure how much money is left after deducting all costs and expenses. In most businesses the No 1 financial KPI!
- Net Profit Margin – While the Net Profit is an actual number, Net Profit Margin will put this number relative to the total sales revenue and therefore enables us to compare it across companies. It basically measures how much profit a company makes for each dollar of revenue it generates.
- Operating Profit Margin – This ratio will provide insights into operating efficiency and pricing strategy by putting the regular operating costs of the business to the operating income. By ignoring income from non-regular business it provides an insights into how much money a company makes (before interest and tax) for each dollar of sales.
- Revenue Growth Rate – Even though there are other factors to consider, in most business the primary driver of ‘making money’ is to grow sales. Revenue Growth Rate basically measures the percentage increase in sales from one period to the next (e.g. annually).
- Cash Conversion Cycle – A main reason why companies go out of business is that they run out of cash (this can happen even if they have strong sales!). Cash Conversion Cycle measures the length in time it takes for an organization to convert resource input into actual cash flow.
Of course, selecting the right indicators for your business has to depend very much on your strategy and strategic objectives. Indicators are only useful if they tell you answers to your most important strategic questions .
In my latest book ‘Key Performance Indicators – the 75 measures every managers needs to know’ I cover 18 key financial indicators together with key indicators for customer, sales & marking, operations, employee and CSR performance.
As always, I am interested in your thoughts. What would you say are your top finance KPIs? Which ones would you add to this list / which ones would you ignore? Pls post your comments….