As a business owner, you’re always working toward something — a revenue record, opening a new location, the day you can fully pay off your debts. With any goal, you’ll set standards that support your journey and measure your efforts as you work to reach it.
When it comes to your company’s finances, that’s where financial KPIs come in. These metrics are vital for ensuring you’re maintaining strong financial health and hitting milestones as you grow.
Without defined KPIs, you’ll operate and make business decisions on a whim. That’s rarely sustainable in the long run.
The key to successfully using these key performance indicators is to know exactly which ones mean the most to your business and monitor them in the right way. Keep reading to learn how to do exactly that.
How to set financial KPIs
To see the big picture that you need to gauge your company's financial performance, you need to set up some processes and metrics that give you a benchmark to work toward.
That’s where financial KPIs come in. These performance indicators give you a high-level view of your revenue, profits, expenses, and other financial data. Setting and monitoring them lets you track and analyze your overall financial health and make necessary changes to improve processes, optimize cash flow, and more accurately forecast finances as time goes on.
1. Gather the right documents
The first step in leveraging these metrics is setting them.
Also known as a financial statement analysis, you'll gather certain documents to get a view of how your accounting data is performing. Typically, you’ll pull your:
- Balance sheets
- Income statements
- Cash flow statements
Once you have these, it’s time to determine where you want to go.
2. Figure out your business goals
Meet with your executive team, your advisory board, and your financial planning team to lay out clear goals for your business. Maybe you want to expand to additional locations or International markets. Maybe you want to reach an IPO.
The business goals you decide to work toward will inform which KPIs you choose to help you get there.
3. Pick the right KPIs
This step can be tricky. While some KPIs apply across the board, deciding which ones are right for your business will depend on a few things.
As we mentioned, you should take your business goals into account. You should also consider your business model and how you currently operate. You can work with your CFO and accounting team to determine which KPIs will be most impactful for your business.
4. Set targets for each
Once you decide which KPIs to track, set targets for how and when you will reach them.
While the targets can vary based on your business and industry, they should always be SMART (specific, measurable, achievable, relevant, and time-bound). You should also take into account industry benchmarks, market conditions, and your current financial performance when setting those targets.
This isn’t a “set it and forget it” situation. Once you establish those KPIs, you need to closely monitor them to make sure hitting expected milestones—and make changes if you’re not.
Monitoring financial performance
To successfully monitor your financial KPIs, you should keep one word in mind: consistency. Consistent check-ins make for consistent analysis that leads to consistent success.
1. Set up reporting intervals
Decide how often you want to pull financial reports on your KPIs. In some cases, you’ll want to check them monthly; in others quarterly. Regardless of the interval you choose, stick to it and closely examine those numbers on schedule.
2. Leverage a real-time financial dashboard
In the same way you shouldn't wait to pull reports, you shouldn't let weeks go by without looking at your financial data. Leverage outsourced accounting software to access real-time KPI dashboards and get a daily look into your accounting operations.
With that real-time insight, you can move quickly and confidently, knowing you have the clarity you need to truly understand where your money is and where it's going.
3. Find a strategic finance partner
It's one thing to be able to see your financial performance and financial data in front of you. It's another understand what those numbers mean for your business and use them for strategic financial planning.
In order to best use these KPIs to build a bright future for your business, you need an outsourced accounting partner on your side who can offer you expert guidance to scale your finances without a hitch.
4. Analyze and adjust regularly
The numbers you set this month may not work six months from now. You should regularly analyze your financial KPIs and targets to ensure they're still supporting your business goals. If you discover they’re not and there are other financial KPIs that would work better, make adjustments to improve your performance tracking.
With all the different metrics you can keep track of, you’re likely wondering where to begin.
Financial KPIs to watch
Most key performance indicators fit into one of five categories. These are some financial KPI examples you can begin monitoring in your own business.
Profitability KPIs
Aimed at tracking what you bring in before and after expenses, these can include:
- Gross profit margins — (Revenue – cost of sales) / revenue x 100
- Net profit margins — Net profit / revenue x 100
- Operating cash flow ratio — Operating cash flow / current liabilities
- Sales growth ratio — (Current net sales – prior period net sales) / prior period net sales x 100
Liquidity KPIs
Meant to determine how easily you can turn assets to cash, these can include:
- Current ratio — Current assets / current liabilities
- Quick ratio — Quick assets / Current liabilities
- Working capital — Current assets - current liabilities
- Accounts payable turnover — Net credit purchases / average accounts payable balance for that period
Efficiency KPIs
Measuring how well your business uses its resources and assets, these can include:
- Inventory turnover — Cost of goods sold / average inventory balance for that period
- Accounts receivable turnover — Sales on account / average accounts receivable balance for that period
- Average invoice processing cost — Total accounts payable processing costs / number of invoices processed for that period
- Days sales outstanding — 365 days / Accounts receivable turnover
Valuation KPIs
Offering an estimation of the total value of your business, these can include:
- Earnings per share — Net income / weighted average number of shares outstanding
- Price-to-book ratio — Market capitalization / book value of equity
- Free cash flow — Cash from operations - capital expenditures
- Price/earnings-to-growth ratio — Price/earnings ratio / percentage of growth rate
Leverage KPIs
Pinpointing how you can use debt to execute a project, these can include:
- Debt-to-equity ratio — Total liabilities / total shareholders’ equity
- Return on equity — Net Profit / (Beginning Equity + Ending Equity) / 2
- Debt-to-assets ratio — Total debt / total assets
- Interest coverage ratio — Earning before interest and taxes / interest expense
Get Real-Time Financial Data at Your Fingertips
See that last step of monitoring your KPIs, adjust as needed?
That’s only possible if you have access to real-time financial data. Otherwise, you won’t be able to see the results of your efforts for an entire month or even quarter, much less make time adjustments.
Hiline has partnered with Digits to deliver 90% accurate financial data now, instead of 100% accurate data when it's too late to act.
Access customizable, easy-to-read dashboards, one-click transaction details and cash flow visibility, and natural language queries with instant answers. Get the data you need to inform and adapt financial KPIs right when you need it.
Learn more about the Hiline + Digits partnership and how you can benefit from real-time accounting today.
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