By Bernard Marr
Tracking key performance indicators (KPIs) will tell you if your business is on track for success, or veering off course and in need of correction.
But when it comes to your financial performance, what metrics should you monitor? Here are the four financial metrics every company should keep a close eye on.
1. Revenue/Sales. How much money are you generating? This is often called the “top line” because it’s at the top of your financial statements. With this KPI, I recommend tracking monthly sales, as well as examining your revenue growth rates. It’s useful to break overall revenue down by product or by region, so you can clearly see where you’re generating money in the business.
Doing that, can also help you spot revenue concentration, where most of your sales are generated from one product or one customer, which can leave your business vulnerable.
2. Profitability. How much money is left at the end of the month, after your expenses? Is your company profitable? Every business has costs, so you need to subtract those expenses from your revenue to get your net profit. This is often called the “bottom line” because it’s at the bottom of your financial statements. The key metric here is net profit margin, which looks at your profits relative to your revenue (the percentage of revenue that is left as profit). Net profit margins vary widely by industry, but a good benchmark to aim for is approximately 10% – if your company is below 5%, that’s usually considered low, and above 20% is comparatively high.
3. Liquidity. This KPI tracks how much money is available in your business. Liquidity is the difference between your current assets and your liabilities. Assets include the cash you have in the bank, the invoices you have already sent out, and your stock. Liabilities include accounts payable. Liquidity is also known as “working capital,” and to have a healthy business, you’re aiming for a ratio between 1.2 and 2.
When you’re examining your liquidity, it is also useful to assess your cash conversion cycle. How long does it take you to get a return after you’ve made an investment? If you put money into buying equipment, developing a new product, or taking on a project, how long does it take before you can collect money back? Over time, you want to reduce your cash conversion cycle as much as possible and generate better liquidity.
4. Return on Investment (ROI). We want to invest in things that generate the biggest possible return to your business. For example, if you invest 1 euro in something and get 5 euros back, that’s a good ROI. In marketing, an ROI of 5 to 1 is good – if you get to 10 to 1, that’s an exceptional return on investment in the marketing realm.
Navigating Your Business with the Right Financial Metrics
Regardless of your business model or industry, your company needs to monitor financial metrics.
Remember: Using the right indicators will help you deliver the right results. You may add additional financial KPIs, but these four metrics (revenue, profitability, liquidity, and ROI) should act as the cornerstone of your financial strategy. And financial metrics alone won’t give you a comprehensive picture of your business, which means you will also need to find KPIs for other key areas of your business, such as customers, operations, and employees.
Want to learn more about key performance indicators, and what you should be monitoring in your business to make sure you’re on track to meet your goals? On my website, you can find lots of articles on the most important KPIs across all business units, as well as the KPI library to help you find the right measures for your company.
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