13 Key Financial KPIs For Boosted Financial Performance

Key performance indicators, or KPIs, are financial data metrics used to manage and help your business, assess its financial health, its potential for growth, and detect any issues before they become a problem for your business.

But what are these indicators or financial ratios, and how do you calculate them?

We came up with a list of finance thirteen KPIs that you and your business should really monitor.

Performance indicators are found on either:

• the balance sheet, or
• the income statement

Studying the entirety of indicators allows you to get a pretty comprehensive overlook of the financial situation of your business at a specific time, and to evaluate:

• your financial balance
• your profitability
• your financial independence

Financial performance indicators are therefore important:

• to optimize the way you use financial resources
• to anticipate and get ahead of potential financial risks
• to plan potential investments, or conversely future necessary budgeting

While there might be a ton of KPIs out there, the majority of them tend to fall under five main categories:

• Leverage KPIs – like the return on equity or debt to equity ratio
• Valuation KPIs – like earnings per share or the quick ratio
• Efficiency KPIs – like accounts receivable or inventory turnover
• Liquidity KPIs – like the current or quick ratio
• Profitability KPIs – like gross profit or net profit margin

There are countless KPIs out there, but here’s thirteen to look out for:

Working capital requirement is a necessary indicator for businesses to:

• compensate for possible short-term cash flow problems
• be able to spend while awaiting collection of funds

• WCR Formula = (average inventory + trade receivables) – payables

Net working capital is the safety cash reserve to meet working capital requirements.

This is the excess money after funding of:

• employees, or fixed assets
• investments through stable resources, or permanent capital and long-term financial debt

NWC Formula = stable resources – long-term employees

Net cash is the money your business has that can be used immediately, i.e., cash on hand. This also reflects a short-term financial balance.

Therefore, net cash is the difference between what you have on hand and your debt. But, if you want to be a bit more technical, we can use two previous indicators to calculate net cash:

Net cash= NWC-WCR

The breakeven point is the amount a business has to earn in order to cover all of its costs, including fixed and variable, and start turning a profit.

It gives an idea of how viable the business is, even before starting.

Breakeven point formula = Fixed costs/((Revenue – variable costs)/Revenue)

Sales margin is the profit generated by businesses, meaning the difference between the sales price and the price of goods and services.

It allows businesses to estimate future revenue streams, but also to change their sales strategy, notably in terms of prices.

Sales margin formula = Revenue (excluding tax) – Costs (excluding tax)

EBITDA corresponds to:

• income generated by the main activities of the business
• after social deductions
• before depreciation

EBITDA, as the name indicates, is therefore the financial result of the business, before interest, taxes, depreciation, and amortization.

EBITDA = Net Income + Taxes + Interest Expenses + Depreciation

It can also be used to calculate:

• Return on capital = EBITDA/Capital invested
• Cost control/efficiency = EBITDA/Revenue

Financing capacity is the surplus generated by the business, that can later be used.

It’s the result of net cash and “non-cash” expenses, such as:

• Depreciation
• Provisions for risks and charges

Formula: EBITDA + cashable items – cashable expenses

Interim management balances represent several financial indicators, allowing you to understand your business’s financial results.

Among those include:

• Sales margin
• EBITDA

But also some we didn’t cover:

• Operating result
• Financial result
• Net result before taxes
• The exceptional result
• Net result

The quick ratio is a performance indicator of a company’s immediate liquidity position, and also whether a company can meet their short-term obligations. It specifically measures near-cash assets, the ones that can be converted into cash quickly, and whether a company can pay off its liabilities without having to sell its assets.

The higher the ratio, the better the financial position of a company is, the lower, the worse and harder it will be for a company to meet its financial obligations.

Formula: QR = CE + MS + AR/CL

Where:

QR = Quick Ratio

CE = Cash & Equivalents

MS = Marketable Securities

AR = Accounts receivable

CL = Current liabilities

Note-Quick ratio is also called the “acid test ratio”.

The debt-to-equity ratio compares the number of liabilities, or debt, to the amount of shareholder equity. It’s specifically used to measure a company’s financial leverage or the amount of debt used to intensify returns from a project or investment. In short, it shows how much a company is funding its daily operations using debt, compared to traditional funds owned by the company.

Debt-to-equity can be used by investors to gauge whether investing in a company would be risky or not. However, different industries have different standards of debt levels, meaning that comparing different companies from different industries may be misleading or unreliable.

The formula for the debt-to-equity ratio is pretty self-explanatory, it is:

Total Liabilities/Total Shareholders’ Equity

Note: This ratio can also be expressed as a percentage.

ROE, or return on equity, is an indicator used to measure a company’s profitability. The formula is pretty straightforward, it’s:

Net income/Shareholders’ equity

Like the previous indicator, debt-to-equity, investors use this as a way of measuring a potential investment. However, in this case, this is used to measure how much return a shareholder gets with a specific stock.

Inventory turnover measures the number of times a company sells and replaces its inventory during a given period. Generally speaking, most companies want to have a high inventory turnover, this means that they’re selling and replacing their inventory fairly quickly, rather than the opposite which means weak sales.

Inventory turnover’s formula is the following:

Net sales/Average inventory at selling price

Current accounts receivable is used to calculate the portion of the company’s customers that pay on time. It’s calculated by subtracting past due accounts receivables from the total amount of accounts receivables, then dividing that by the total amount of account receivables. A higher ratio usually indicates fewer past due invoices, and a lower ratio usually means the company in question is having a hard time getting its customers to pay.

(Total Accounts Receivables – Past due accounts receivables)/ Total Accounts Receivables

While most of the indicators we just listed are applicable to the majority of businesses, some of them, like inventory turnover, for example, are specific to companies that deal with manufacturing.

Show in the form of a dashboard, there are two main ways you can study KPIs:

• Temporally, study the evolution of the numbers from one period to the next
• Comparatively, to see the difference between your results and the competitions’

You should also know that having an adapted software program can make reading and comparing these indicators a lot easier.

A tip from us: think about combing financial indicators with non-financial indicators, like new client turnover, to really get an overall view and long-term vision of your business’s current situation.