August 15, 2024
Tracking financial KPIs is particularly important for small to medium-sized businesses, giving them the focus and insights to not only better navigate uncertain times, but also drive those initiatives that lead to operational efficiency, improve their liquidity and increase growth.
In addition, financial KPIs can help guide your strategic activities, helping you to assess progress towards financial objectives, gauge the success of different initiatives and business units, as well as identify areas for improvement.
In this guide, we’ll explain why financial KPIs are so important in 2024 and share 11 of the most critical ones that your business needs to know.
We also detail the benefits of tracking these metrics, what you should consider when choosing KPIs and explain how financial KPI dashboards and tools can help make the process easy.
Financial KPIs are quantifiable metrics that can help your business monitor its overall performance and progress toward financial goals.
Providing insights into profitability, liquidity, efficiency, solvency and growth, they help you make informed decisions, align strategies with financial goals, proactively identify issues and capitalise on your opportunities to grow the business.
Financial KPIs can help you get a clearer picture of your financial data, providing a snapshot of the relationship between different data sets. For instance, the net profit margin ratio shows net income as a percentage of revenue, allowing you to see how much revenue remains as profit after subtracting all expenses.
Analysing financial KPIs across different periods helps you spot trends over time, while comparing them against industry benchmarks gives you an idea of your business’ performance relative to competitors.
Your business collects a seemingly overwhelming amount of financial data. Financial KPIs help you transform this data into a manageable set of critical indicators.
They distil complex financial data into clear, actionable insights that help you make better decisions, hone on areas of improvement and make the most of your business’ strengths.
What are the specific benefits financial KPIs can provide your business? They can help you:
KPIs help you gain insights into specific areas of financial performance – in particular, your business profitability, liquidity, efficiency, solvency and growth. Let’s look at some financial KPI examples for each of these categories to give you a sense of the insight they can provide.
Profitability metrics measure how efficiently a company generates profit.
Three of the most popular profitability KPIs for businesses include:
This ratio measures the profitability of your business’ core operations by showing the percentage of revenue that remains after deducting cost of goods sold (COGS). It allows you to gauge how efficiently you’re producing and selling products and services, and how much profit you’re generating before accounting for operating expenses, interest and taxes.
Use the below formula to calculate gross profit margin:
Gross profit margin = (net sales – COGS) / net sales x 100%
Net profit margin measures the percentage of revenue that remains as profit after all expenses are deducted, including operating expenses, interest and taxes. It indicates how efficiently your business is converting revenue into actual profit and its ability to control expenses.
Use the below formula to calculate net profit margin:
Net profit margin = (net income / revenue) x 100%
This is a widely used financial KPI that measures the profitability of an investment or project relative to its cost. Expressed as a percentage, ROI shows how efficiently your business is using its resources to generate returns.
Use the below formula to calculate ROI:
ROI = (net profit from investment - cost of investment) / cost of investment ×100
Liquidity ratios assess your business’ ability to meet short-term obligations, ensuring it can cover its debts as they come due. Two of the most widely used are:
This measures your business’ ability to pay short-term obligations with its current assets, which include cash, accounts receivable, inventory and other assets expected to be converted into cash or used up within a year. A ratio exceeding 1 indicates your business has strong liquidity, with sufficient short-term assets to cover current liabilities.
Use the below formula to calculate the current ratio:
Current ratio = current assets / current liabilities
The quick ratio, also known as the acid-test ratio, provides a more stringent measure of liquidity than the current ratio. It’s a financial KPI that assesses your business’ ability to meet short-term liabilities with its most liquid assets; namely, those that can be converted into cash within 90 days.
This includes cash and cash equivalents, marketable securities and accounts receivable, while excluding inventory.
Use the below formula to calculate the quick ratio:
Quick ratio = quick assets / current liabilities
Efficiency ratios evaluate how effectively your business uses its assets and manages its operations. Two key efficiency ratios to consider adopting include:
This ratio indicates the efficiency with which your business is managing inventory by measuring how often it’s sold or replaced in each period. A lower turnover rate can indicate you’re purchasing too much stock or that sales are low, while a higher ratio indicates you’re effectively minimising slow-moving or obsolete stock.
Use the below formula to calculate inventory turnover:
Inventory turnover = COGS / average inventory balance for period
Accounts receivable turnover shows how quickly your business collects payments from customers. By calculating the number of times accounts receivable are converted into cash for a given period, this ratio indicates the effectiveness of your collection policies, credit terms and billing practices.
Use the below formula to calculate accounts receivable turnover:
Accounts receivable turnover = sales on account / average accounts receivable balance for period
Solvency ratios measure your business’ ability to meet debt obligations and sustain operations over the long term. Two popular solvency ratios among Australian businesses include:
This ratio compares your business’ total debt to its total shareholder equity. It shows the degree to which you’re financing operations through debt versus wholly owned funds, with a high ratio indicating that your business is highly leveraged.
Use the below formula to calculate the debt-to-equity ratio:
Debt to equity ratio = total liabilities / total shareholders’ equity
The interest coverage ratio indicates your business’ risk of defaulting on its debt. It measures your ability to pay interest on debt like loans and bonds, measuring the ratio of operating profit to interest expense. A higher ratio means you are in a better position to service debt.
Use the below formula to calculate the interest coverage ratio:
Interest coverage = earnings before interest and tax / interest expense
Growth metrics track your business’ expansion over time. Let's look at two commonly used ratios that provide visibility of growth.
Typically calculated quarterly or annually, this measures the percentage increase or decrease in your business’ total revenue for a given period. It can indicate the effectiveness of your sales and marketing strategies as well as the demand for your products and services.
Use the below formula to calculate the revenue growth rate:
Revenue growth rate = (revenue in current period − revenue in previous period) / revenue in previous period ×100
Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) is a widely used financial KPI that evaluates your business’ operating performance by focusing on the profitability from core operations, while excluding non-operational factors. A higher EBITDA suggests your company is efficiently generating earnings from its core operations.
Use the below formula to calculate EBITDA:
EBITDA= net income + interest + taxes + depreciation + amortisation
Effective KPI tracking requires selecting the right metrics, using the right tools and integrating tracking into regular business processes. Let’s look at what you should consider when choosing KPIs and how technology can help make tracking easier.
Choosing the right financial KPIs from what seems an overwhelming range of options is often a challenging task.
Some KPIs are almost universally used, like net profit margin and gross profit margin, while others may only be useful in certain industries or to track progress toward specific business goals.
Ultimately, the best KPIs to use will be those that align with your business’ goals. For instance, if your business is focussed on maximising growth, KPIs like revenue growth rate and EBITDA make sense.
On the other hand, if you’re aiming to increase efficiency, ratios like inventory turnover and accounts receivable turnover are key. Other factors you may want to consider when choosing financial KPIs include:
Modern cloud-based software can help take the time and effort out of monitoring and analysing key business metrics. Solutions like Fathom offer financial KPI dashboards that make it easy to measure, understand and improve key metrics.
With over 50 common financial KPIs and the ability to create custom KPIs, with Fathom you can track the metrics most relevant to your business.
Key features include daily sync with online accounting systems, comprehensive KPI scorecards and the ability to set and track targets. You can also consolidate and benchmark KPI results across multiple companies, assign importance levels to each KPI, and view results for any specific period.
Fathom also integrates seamlessly with leading accounting platforms like Xero, QuickBooks and MYOB, making it simple to connect and get more out of your data.
Watch the video to discover more about tracking financial KPIs in Fathom:
KPIs are a valuable tool for evaluating business performance, but to truly get the most value from them, understanding the story behind the numbers is essential.
It’s important not to take KPIs at face value and to understand the context behind the figures. For instance, a KPI showing a decline in revenue might be due to a one-time event, such as a major client delaying payment until the next quarter. This kind of drop is not necessarily due to a failure in your sales strategy.
Another example is a temporary increase in the debt-to-equity ratio. This might occur if you took out a significant loan to fund a new business initiative. Normally, a higher debt-to-equity ratio could signal financial instability, but in this case, it would be prudent to monitor this ratio to ensure it returns to normal as the investment starts generating returns.
It’s therefore crucial to understand the context behind what KPIs indicate and to apply common sense before acting on them.
Benchmarking your KPIs against industry standards helps gauge your performance relative to competitors. It identifies areas where your business excels and highlights opportunities for improvement.
One place to access industry benchmarks is the Australian Taxation Office (ATO) site, which provides financial ratios of Australian businesses based upon their activity statements. The ATO also provides small business benchmarks based on financial ratios, across a variety of industries.
Another way you can get more value from financial KPIs is to compare them to historical data to identify trends over time. This helps you understand whether your business is improving, declining or remaining stable in specific areas.
Historical data provides a realistic basis for setting future performance targets. Goals based on historical trends are more achievable and realistic.
An example of a business that successfully used financial KPIs to gain better strategic direction and align its team is London-based digital agency Matter of Form.
Being a creative agency, the firm had a specific set of metrics it needed to track.
"Our team understands that by hitting targets and being successful as a business, we can produce our best creative work," Matter of Form’s Chief Operating Officer Fred Moore said.
However, lacking a financial KPI dashboard to track performance, the agency needed a way to create tangible financial and operational goals.
To determine which financial KPIs to track, Moore explained that his team worked together to come up with 15 goals they needed to do every month to ensure success.
"It was a totally positive experience, and it came down to five financial KPIs, five sales KPIs and five operational KPIs," he said.
With Fathom, Matter of Form chose from over 50 financial KPIs to track profitability, activity, efficiency cash flow and growth. The solution provides the ability to assign targets for KPIs and define the importance of each, with alerts that tell you when a target is exceeded.
These capabilities meant Matter of Form’s team were “all on the same page,” said Moore.
"Every month Fathom presents a beautifully simple and intuitive visual expression of where we need to be in relation to our business targets,” he said.
Financial KPIs are not the only business critical metrics Matter of Form tracked with the help of Fathom.
"Not only do we measure financial KPIs, but we can also input non-financial KPIs, and then create our own formula KPIs that are most relevant to our business," said Moore.
Fathom's integration with the agency’s accounting solution also their simplified processes.
"The connection with Xero makes it fantastically easy to import data, saving us an awful lot of time," Moore said.
Beyond the time savings and critical business visibility Fathom offers, the solution also helped Matter of Form’s team focus their energy on what really matters for the business.
"Fathom provides a bridge between the creative culture and financial culture. It's genuinely motivating for all our employees," Moore said.
Managing financial KPIs comes with its own set of challenges. Let’s look at some of the common pitfalls and how to overcome them to maintain effective KPI tracking.
Understanding and addressing the following challenges is crucial for maintaining the accuracy and usefulness of your performance metrics.
Tracking too many KPIs can lead to information overload and dilute focus on critical performance areas. It’s therefore important to select those KPIs that align with your strategic goals. While there’s no set number of KPIs a business should use, it’s recommended to track between four and 10.
Establishing unattainable KPI targets can demotivate employees and create a culture of failure. Make sure to set realistic and achievable targets based on historical performance and industry benchmarks. Regularly review and adjust targets as needed.
Failing to regularly review and update KPIs can mean that as your business grows and evolves, they may longer be as relevant and useful. It’s therefore essential to schedule regular KPI reviews so you can adjust to reflect changes in your business’ strategy or market conditions.
Collecting feedback from employees and managers about the effectiveness and relevance of your KPIs can also help keep them up to date, as well as keeping tabs on the financial benchmarks typically used in your industry.
Without employee buy-in, KPI initiatives may face resistance within your business. It’s therefore critical to involve employees and other departments in the KPI development process and to communicate how they can contribute to your business’ success.
In 2024, amidst an unpredictable economic landscape, tracking financial KPIs is more crucial than ever for businesses.
These metrics offer a way to focus on what matters to your business – so you can make the most of opportunities, identify areas of improvement and proactively address risks. They also give you an idea of how your business is tracking compared to previous periods and the competition.
Incorporating financial KPIs into your business strategy not only provides clarity and direction but also ensures that every department and employee is aligned with the company’s financial goals.
Try Fathom free for 14 days to see how you can easily track both financial and non-financial metrics with intuitive KPI dashboards and compelling visuals. This cloud-based solution makes it simple to set targets, monitor progress and generate detailed reports to drive smarter growth and informed decision-making.
You can learn more about the benefits of Fathom on our dedicated site or by exploring our blog, which contains a range of tutorial webinars and customer stories.
Kit is the Content Marketing Manager for The Access Group APAC and Fathom. He is a former journalist with extensive experience in content writing and copywriting across various industries, including higher education, not-for-profit, and finance sectors.
