Top 11 Key Financial Performance Indicators for better business financial

Top 11 Key Financial Performance Indicators for better business financial

It is not just important but necessary to stay a daily check on the financial health of your business. You define certain key financial performance indicators (KPIs) to live performance and take corrective actions in business strategy wherever required. It gives you the holistic view of your business operations.

Our expert team of accountants has enlisted such indicators to assess financial performance in various areas of your organization. it’ll assist you analyse and grow your business exponentially.

Gross profit margin

This factor tells you whether the worth of your product/goods is fundamentally right or not. Gross profit margin is essentially the general profit you gain without covering up all the fixed operations cost. Hence, better margins equal better profits.

Here’s the straightforward formula to calculate gross profit margin:

Gross profit margin = (revenue – the value of products sold)/revenue

Net profit

Sounds like the first reason for your business. Doesn’t it? This is often what you’ve got ultimately after paying all of your bills. Simply put, deduct your total expenses from the entire revenue to calculate your net income.

Let’s assume, your total billing is $2, 00,000 and your monthly rent, employee salaries, and other fixed charge expense collectively add up to $1, 20,000. Your net income is $80,000.

Debt asset ratio

The Debt asset ratio is your assets financed with debt. It is, in other words, telling you the financial leverage utilized in your business.

The higher ratio indicates financial risk, so as a business owner, you ought to have proper mixture of shareholders’ funds and debt wisely. This is often a critical KPI to work out the credibility of your business within the eyes of investors also as customers.

Working capital

It is the capital; a business must run its day to day activities. Capital is essentially the liquidity available for on-going online bookkeeping services.

Working capital = Current assets – Current liabilities

The optimum level of capital helps in achieving better operational efficiency. This indicator suggests you to stay the enough positive difference between current assets (accounts receivable, cash etc.) and current liabilities (accounts payable, provisions etc.) for smooth business operations.

Operating income

It is essentially the quantity of money that your business produces by your regular business operations like Sales, Purchase etc. it’s important that your business operations generate sufficient income to be more financially independent.

Operating income (OCF) = Operating Income (revenue – the value of sales) + Depreciation – Taxes Change in capital

Positive income indicates the promising future and negative cash flow signifies raising additional capital or debt in your business.

Return on equity

Return on equity (ROE) is that the measurement of a company’s profitability. It represents the speed of returns, stockholders receive from their investments. It indicates the financial performance of a corporation during a reference to shareholders’ money.

Financial performance

ROE = net or Profits/Shareholder’s Equity

A good ROE brings trust among shareholders and attracts other investors.

Debt to equity ratio

Debt to equity ratio is a crucial KPI to work out the financial accountability of your business. it’s calculated watching your total liabilities against equity.

Debt to equity = Total liabilities/Total equity

It gives you a far better understanding of your capital structure. It’s basically the financial leverage ratio to live your company’s ability to satisfy short and future obligations.

Quick ratio

As the name suggests, Quick ratio is that the fastest way of assessing company’s financial position. It’s company’s current ability to pay off liabilities and debts with readily available quick assets.

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It is also referred to as the “Acid test”. It shows the financial performance and adaptability of your company.

Inventory turnover

There is a non-stop inventory flow in and out of accounting firm in memphis. Inventory turnover represents the amount of your time, your company sells and replaces inventory during a specific period of time.

Inventory turnover = Cost of inventory sold/Average inventory value

It ensures that you simply don’t have excessive inventory compared to your sales. It gives you vital details of your sales and production planning for better efficiency of operations.

Accounts payable turnover

Accounts payable turnover is that the rate at which your business pays to its suppliers. This is often a stimulating KPI to work out and prepare income also as find flow planning.

Accounts payable turnover = Total suppliers purchases/Average accounts payable

If the ratio declines, it indicates decrease in payment frequency to suppliers which is negative signs for financial position. Delay in payments could deprive you of vendors’ early payment discounts.

Accounts receivable turnover

Accounts receivable turnover indicates the speed at which your business collects due payments. This KPI ensures that you simply receive funds during a timely manner which is extremely crucial for your business. This KPI helps in income planning, determine credit policy and sales discount policy.

Accounts receivable turnover = Sales/Average assets

It evaluates your credit policy, a high turnover suggests aggressive collection policy and a coffee turnover suggests inadequate inflow of funds.

Conclusion:

Evaluating financial performance is an important a part of any business. It’ll significantly contribute to your future success. We hope these 11 financial KPIs assist you measure your business growth also as prepare budgets and business strategy.