It’s vital for companies to set standards by which their performance can be judged. Finance metrics and key performance indicators (KPIs) help companies to track performance, establish goals and decide whether targets are realistic.
For most businesses, financial KPIs will include a range of measures including sales, profits, liquidity and more. This guide explains financial metrics, their importance and how you can decide which ones will help your company.
Measuring performance by using financial metrics is critical for business success. Metrics allow firms to capitalise on areas that are profitable while minimising losses by addressing underperforming areas at the earliest opportunity.
The key to the effective use of financial KPIs is understanding the end goal – the level, output or figure being aimed at by any department. It’s not a case of tracking every possible metric but rather understanding and selecting the most effective, relevant and specific metrics that provide the best insight into your company’s performance. These are the KPIs that determine whether or not a company is profitable, sustainable or at risk. Companies should decide how often these metrics are measured to deliver the information they need.
Organisations use metrics and KPIs to analyse their financial status and track their growth (or lack of it!). Metrics can help to identify any issues preventing them from achieving their goals, giving management two choices: solve the problems or adjust the goals to make them more realistic.
There is no single financial KPI that is universally applicable to, and helpful for, every business. Some companies may look at profitability or valuation whereas others may track return on sales or turnover. Each company will have different KPIs to prioritise.
The financial KPIs a business considers will depend on
However, the following are some of the common elements that a financial metric must include:
Companies should identify and measure the financial KPIs most appropriate to their business strategy. Deciding on the right metrics to track can be difficult.
To identify the right metrics, companies must answer key questions.
Companies that answer these questions will be taking the first steps in choosing the right metrics to measure their performance. Answering these questions will also allow companies to determine how to assess and adjust their strategy to make sure they remain on track to meet targets, boost performance and increase profits.
Many firms will need to track multiple financial KPIs simultaneously – each managed by different teams. For example, a sales manager may be responsible for measuring and driving sales while the finance manager may oversee the resulting profit targets.
Firms with relevant metrics and tracking procedures will be best placed to boost performance and minimise losses.
Here, we take a look at how a business may choose its financial KPIs and execute a strategy to maximise the benefits of each:
After a disappointing quarter of results, ABC Exporter Ltd. reassesses its financial measures of performance. The business needs to identify where it is meeting its targets and where it is underperforming.
Firstly, ABC Exporter considers the factors that contributed to its underperformance in the previous financial quarter. These were:
ABC Exporter then decides on the metrics that directly address these areas – working capital, pricing and profits.
These are assigned to the relevant departments within the business, with ABC Exporter’s Sales Manager tasked with revisiting its pricing structure and the finance department tasked with measuring working capital and profits.
ABC Exporter decides it will review these metrics each quarter and also in 12 months’ time, with the target of reaching £100 000 (GBP) in working capital and increasing net profits by 30%.
Each quarter, ABC Exporter revisits these targets and reviews performance – making further adjustments to sales and financial activity where necessary. These include working with an invoice factoring provider to free up liquid capital and revisiting the business’ pricing structure to improve its bottom line.
After 12 months, ABC Exporter reaches its financial targets.
Financial metrics can fall into one of a few categories, which help businesses identify the different areas they should be measuring.
Some of the common categories of financial KPIs include:
These categories can help if you’re trying to decide which metrics to track for your company.
Within the above categories, common KPIs would include the following:
Once you identify the most relevant metrics for your business - and those that provide you with the most insight - following just those will be more effective than tracking every metric possible. As mentioned above, there is no single KPI that is universally acceptable to every business.
About the Authors
This article is authored by the Stenn research team and is part of our educational series.
Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.
Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.
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