In order to improve and to sustain your company’s activity, it is essential to permanently evaluate its financial and commercial health. Therefore, it is fundamental to select the appropriate Key Performance Indicators (KPI) to identify, so that the financial service can detect the strengths to build upon, and the weaknesses to optimize.
In the following article, you will find some examples of Key Performance Indicators to integrate into your reports.
The “general” financial ratios
Calculating the revenue fluctuation is most probably the most evident performance indicator to implement into your report. In fact, it will be an excellent scale to measure the company’s financial health. You can compare your revenue to your competitors’ to position yourself.
Calculation: current sales revenue/past year’s sales revenue
Another example of a KPI is the added-value calculation, which allows to measure the production value of goods made by a company and to stay informed of your company’s development and activities.
It is a reliable representation and can be calculated in multiple ways:
Calculations: sales revenue – cost of production
The KPIs to analyze the end of year statement
The net working capital
The net working capital represents the resources that a company benefits from in the long-term. These resources serve as a security “mattress” destined to be used in case of a major problem: a client bankruptcy, a decreasing sales revenue, etc.
Calculation: Regular income – sustainable employment
Or: current assets – current liabilities
Working capital requirement
The working capital requirement indicates the amount that a company must possess in order to pay the current expenses during the cash flow swap. It is a key indicator of the company’s health that absolutely needs to be followed on regular bases.
Calculations: average inventory + accounts receivables – liabilities
The KPIs to evaluate the profitability
The breakeven point
The break-even point is an essential KPI: it allows to calculate the needed level of revenue to reach to cover the expenses. Reaching the break-even point is a company’s objective, as it is the amount to surpass to start generating profit. The break-even point is generally calculated when the financial forecast is made.
Calculation: fixed costs / (revenue – variable costs)
It is a common indicator but there isn’t an “exact” definition: what is called gross margin generally implies the sales margin, which is the margin made by a company.
Calculation: sales price – purchase price
The net margin shows the global profitability of a company: the higher it is, the more optimal the company performance is. Its result is represented as a percentage.
Calculation: net profit/ sales revenue x100v
KPIs to analyze the funds
Net Cash Position
The net cash position corresponds to the short-term available amounts when the company needs it. These amounts allow to know the financial stability (or instability) of the company: it is imperative to follow this indicator.
Calculation: working capital – working capital needs
Or: available funds – short-term liabilities
The clients’ average payment time
Lastly, the clients’ average payment time, as its name indicates, represents the number of days between the date the good/service was supplied and the date the payment was made. This indicator allows having a stronger knowledge of the required working capital.
Calculation: (net receivables/ net sales revenue) x 360 days
18 February 2019