Every business has to pay attention to its finances to keep on operating. Measuring finance is essential to any firm, regardless of size, sector, or other factors. The financial aspect is constant and will determine whether your company is set up for success or not.
Financial key performance indicators (KPIs) are specific indicators that assist directors and financial professionals analyze the business and pursue strategic goals. However, different organizations adopt various financial KPIs to measure their success and drive expansion. Also, there are numerous significant financial KPIs and metrics that you should be monitoring. You can’t ignore any one, or you risk ruining your business.
What Should Finance KPIs Measure?
Depending on the kind of data they track, most KPIs can be used to measure five major things; liquidity, profitability, solvency, efficiency, and valuation. It’s safe to say that these parameters affect all business types and sizes. Therefore, KPIs are important to measure the financial health of businesses.
They will help you determine :
- Profitability: Profitability KPIs should be focused on evaluating the effectiveness of a company’s performance.
- Liquidity: The current and quick ratios are the two liquidity ratios that the global community of creditors primarily uses to assess and evaluate a company’s creditworthiness. They determine the capacity of the business to continue operations and pay off its debts
- Efficiency: This will determine how the business’s resources are being converted into profits. A highly efficient business will spend the least amount of money to generate profits.
- Valuation: This talks about the value of your company and its worth. This information is useful when applying for funding from investors.
- Leverage: This helps to determine how much money is being made for the investor. It will also help you compare cash flow with the company’s market value.
Why is Financial KPIs Important?
Financial KPIs allow corporate executives to plan for the big picture and spot any critical issues without getting swarmed with details of what’s happening behind the scenes. If all activities are going as planned, these indicators reveal it, as well as when there are substantial changes or signs of underlying issues. KPIs can be used to manage the business and help it to accomplish certain objectives. The truth is that financial KPIs are difficult to compile on your own. You would need the input of a professional to get the best results and ensure that you are measuring the right thing.