Financial KPIs can improve an organization’s overall decision-making process and must be monitored regularly. Your company might undertake different projects and turns, and you will witness too much fluctuation in the performance chart. How can you steady the performance graph of your company? It takes a creative mind to monitor and understand financial KPIs; no one can help more than financial managers. However, a basic understanding of these performance indicators is vital, and we are here to help you. This read will uncover financial KPIs you should monitor to measure performance. Keep scrolling to learn more.
Financial KPIs to monitor
Financial indicators can be intimidating – especially if you don’t have a financial background. Your company’s financial statements will reveal a few metrics you must analyze to understand the growth/decline pattern. Having a basic idea of things will help you! Financial managers, accountants, bookkeepers, and top managers will assess these metrics to develop viable solutions for your company. Without wasting further time, let us explore and understand financial KPIs that can affect growth and performance.
1. Net Profit margin
Net profit margin is a profitability measure/ratio which gives financial managers a picture of net profit. It measures what percentage of the income or revenue is left when business costs are subtracted. These costs include goods sold, operating expenses, taxes, and interests. The simple formula to calculate net profit margin is:
Net profit margin = Net profit/revenue x 100
Financial managers can rely on this indicator to see how much revenue they can save after paying expenses and taxes. It pictures the business profitability in general, considering not only the costs but all other expenses. The higher the percentage, the better!
2. Gross Profit margin
The gross profit margin is not much different than the previous profitability ratio, except for a few things. Net profit margin measures the revenue after subtracting the cost of goods sold and other operating expenses. In contrast, gross profit margin shows the revenue left after subtracting the cost of goods sold only (no other expenses are subtracted here). It is calculated as:
Gross profit margin = Revenue – cost of sales/revenue x 100
Gross profit margin never accounts for overheads as it only deals with profitability for a product line. It does not include operating expenses, which sets it apart from the previous one. Do you want to keep books on expenses and profitability in a specific period? You better opt for accounting and bookkeeping services in Dubai and let accountants help you.
3. Current Ratio
The current ratio is a measure of liquidity for any business. Financial managers can use this indicator to understand the ability of a business to pay its short-term debt. Outside parties like lending institutes and investors would also be interested in this figure, as it defines liquidity. Here is a simple formula to calculate the current ratio:
Current ratio = Current Assets/Current Liabilities
The current ratio helps financial managers realize whether the business can cover its short-term obligations with its current assets. If yes, the business is said to be liquid and good. If not, the top-level management must think of something serious.
4. Quick Ratio
The quick ratio is another financial indicator for a business, measuring its ability to cover its short-term obligations with highly liquid assets. The quick ratio, also known as the acid test ratio, differs from the previous one regarding the liquid assets it considers. Highly liquid current assets include cash, marketable securities, and accounts receivables. You can calculate the quick ratio using the following formula:
Quick ratio = Current Assets – Inventory/Current Liabilities
The inventory is taken out of the equation as it can take a bit longer to generate cash. The more liquid your organization is, the better the results. Do you want to keep an eye on these metrics for better performance? Consider opting for accounting and bookkeeping firm in Dubai and let professional accountants help you!
5. Financial leverage
Financial leverage, or equity multiplier, refers to the percentage of debt used to finance your assets. If all your organization’s assets are financed using equity (with no debt), the multiplier would be 1. As the percentage of debt increases in your assets, the multiplier would increase from 1. It can be calculated with the following equation:
Leverage = Total Assets/Total Equity
The higher the leverage impact of the debt, the higher the risk of the business. Businesses should keep an optimal balance between debt and equity financing, which can keep the business wheel rolling.
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