Growing Your Business

5 Best Financial Key Performance Indicators (KPI's) For Your Business

by
Bob Mason
on
11/15/2016
5 Best Financial Key Performance Indicators (KPI's) For Your Business

To ascertain your company’s financial health, you must do more than scan the amount of revenue earned on an income statement. To determine whether your company is meeting or exceeding its goals, studying financial key performance indicators, more commonly referred to as KPI’s, is crucial. KPI is a term referring to the kinds of metrics companies utilize to measure performance. By closely monitoring the following financial KPI’s, you’ll increase your odds of achieving long-term success.

Gross Profit Margin

In order to succeed in business, you must price the goods or services you offer to customers effectively. Analyzing your gross profit margin will inform you whether you’ve mastered this strategy. To compute your business’s gross profit margin, you must first determine your gross profit. Gross profit is calculated by subtracting your business’s cost of goods sold from its revenue. Once arriving at your company’s gross profit, divide it by its revenue. Your gross profit margin should be big enough to allow you to meet operating expenses and still earn a net profit.

Net Profit Margin

Your net profit margin informs you what percentage of your company’s revenue was true profit. To ascertain this important KPI, you need to compute your company’s net profit first. This figure can be determined by subtracting your company’s total expenses from its total revenues. After calculating the net profit of your business, divide it by total revenue to arrive at the net profit margin. By studying your company’s net profit margin, you can both estimate future profits and establish benchmarks for profitability.

Inventory Turnover

Inventory turnover shows you the number of times inventory is sold or utilized during a specified period of time. This crucial KPI tells you how effectively your company is moving goods. Computing inventory turnover involves accumulating the cost of the inventory your business has sold during a given period. Divide this number by the cost of remaining inventory. Obviously, striving to achieve a high inventory turnover rate is recommended. However, be cautious when thinking about meeting this goal by drastically decreasing sales prices. Analyzing your business’s inventory turnover will assist you with measuring and planning for needed inventory modifications.

Current Ratio

The current ratio helps you determine whether you can pay your business’s current liabilities with its current assets. To calculate your company’s current ratio, simply divide its current assets by its current liabilities. If this amount equals less than one, your business doesn’t currently have enough cash, or other readily convertible assets, to pay its upcoming bills.

Return on Equity

Your business’s return on equity demonstrates how effectively it can earn revenue for every unit of shareholder equity. To compute your company’s return on equity, divide its net profit by its total shareholders’ equity. Return on equity provides a glimpse of both a business’s profitability and efficiency. An impressive return on equity reveals to shareholders you’re utilizing their investments to grow your company.

Looking at your company’s income statement, balance sheet, and statement of cash flow is important. However, in order to assess the real, financial health of your business, you need to utilize the numbers contained on these statements to zero in on specific details. Calculating the aforementioned financial KPI’s will help you accomplish this vital task.

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Bob Mason

Bob Mason

Bob Mason is the founder of Coast Financial Services Inc. servicing both the Santa Cruz, and San Jose areas. Bob Mason is a skilled financial professional who is fully equipped to assist any of your accounting needs. Founding his firm in Santa Cruz, Bob understands the importance of small businesses and how they form the backbone of the area. Coast Financial Services, Inc. has been dedicated to the growth and profitability of businesses in Santa Cruz for 17 years. To learn more about Bob Mason and the rest of his team, visit their website.

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