In a complex and uncertain marketplace, every goal your business pursues, every innovation you develop, and every process or workflow you rely on has a profound effect on your competitive strength, longevity, and profits. You need a reliable and consistent method for determining just how effective your business processes are—and making improvements to them where required—in order to set and meet the goals that will help your business thrive. That’s where key performance indicators (KPIs) come into the picture.
Perhaps unsurprisingly, well-optimized financial processes are especially important to ensuring your company meets its goals for maintaining adequate cash flow, reducing operating expenses, and boosting profits. You can track and adjust your workflows for greater efficiency, lower costs, and greater return on investment by monitoring some of the most common, and useful, finance KPIs in use today.
The Importance of Tracking Finance KPIs
Every company in every industry, from small businesses to global corporations, needs a convenient way for its leadership to access, review, and improve the company’s financial health. Using KPIs gives stakeholders a convenient and comprehensive way to gain real-time insights into their company’s business performance and the status of business-critical workflows.
Finance KPIs include both core accounts payable KPIs tied to invoice processing costs and approval workflows as well as more advanced financial metrics such as Working Capital, Cash Conversion Cycle, and both Gross and Net Profit Margins.
For the finance department, these KPIs provide clear benchmarks for performance, allowing your team to identify areas in need of immediate improvement and address potential problems before they become disasters.
For leadership, having on-demand, real-time access to this information simplifies audits, improves strategic decision making, and makes it easier to optimize processes for even greater savings, productivity, and value.
“By using KPIs to monitor financial health and taking advantage of advanced technologies like process automation, artificial intelligence, and deep analytics, you’ll be well positioned to measure, analyze, and streamline your company’s financial performance.”
20 Essential Finance KPIs
Deciding which financial KPIs to monitor will vary from one company to the next, but chances are, many companies will be tracking most or all of the same KPIs that have direct impact on financial performance.
1. Working Capital
How much cash do you have on hand to meet your short-term financial obligations? Working capital compares your assets, (e.g., short-term investments, accounts receivable, inventories of raw materials and/or finished goods, and available cash) to your current liabilities (e.g., accounts payable) to determine liquidity (i.e., your company’s ability to generate cash when you need it).
This KPI is calculated as follows:
Current Assets – Current Liabilities = Working Capital
2. Gross Profit Margin (GPM)
This KPI measures the revenue remaining after you deduct the Cost of Goods Sold (COGS), divided by your total sales revenue. Gross profit margin effectively tells you how much income you’re retaining from every dollar in total sales. For example, if your GPM was 43% in a given period (usually a year), then your company had 43 cents from every dollar it earned to put toward marketing, administration, and other costs.
This KPI is expressed with:
(Total Revenue – COGS) ÷ Total Revenue = Gross Profit Margin
3. Net Profit Margin (NPM)
One of the most closely monitored KPIs for many companies, net profit margin provides a thumbnail sketch of how effectively your business transforms revenue into profits. NPM is your profit after subtracting all interest, taxes, operating expenses, and depreciation. It is often converted to a percentage for greater analytical utility.
So, for example, a company with an NPM of .23 converts 23% of its revenue into profits.
This KPI is expressed using the following formula:
Net Profit ÷ Revenue = Net Profit Margin
4. Operating Profit Margin (OPM)
Also known as EBIT (Earnings Before Interest and Tax), the operating profit margin KPI is another closely monitored metric. It measures the overall profitability of your business and the profits remaining after you pay all your operational costs. It does not include tax calculations or investment revenue. As with net profit margin, the higher your OPM, the better the financial health of your business.
This KPI is a simple ratio:
Operating Profit ÷ Gross Revenue = Operating Profit Margin
5. Operating Cash Flow (OCF)
This KPI shows how much revenue is created by the daily business operations of your company. It’s used to determine a company’s ability to produce positive cash flow for growth, innovation, and investments.
This KPI is calculated as follows:
(Net Income) +/- (Changes in Assets & Liabilities) + (Non-Cash Expenses) = Operating Cash Flow
6. Current Ratio
This KPI measures how well your business can cover its short-term financial obligations within a given term (usually 12 months). As a direct ratio of your current assets to your current liabilities, it’s critical that your current ratio remains above 1 (ideally 2 or higher), as lower values indicate your company’s overextended and may not meet its financial obligations if they were suddenly called in.
Like OPM, this KPI is expressed as a ratio:
Current Assets ÷ Current Liabilities = Operating Profit Margin
7. Quick Ratio (Acid Test)
Like Working Capital and Current Ratio, the quick ratio/acid test ratio measures your company’s liquidity (ability to cover its short-term liabilities). It does not, however, include liquid assets such as inventories of raw materials and finished goods, providing a somewhat clearer view of general financial health.
You can calculate this KPI as follows:
(Cash + Accounts Receivable + Short-Term Investments) ÷ (Current Liabilities) = Quick Ratio
8. Burn Rate
This metric measures how quickly you’re spending money during a given period (e.g., weekly, monthly, annually, etc.). Burn rates provide a quick snapshot of how sustainable (or unsustainable) a company’s current operating costs may be. It’s especially useful for small businesses who may not have access to, or the capabilities to perform, in-depth financial analysis using traditional means.
9. Current Accounts Receivable (CAR)
This KPI collects all outstanding debt into a single value. It’s used when calculating estimated future revenue, as well as other financial KPIs like average debtor days (the average amount of days required for debtors to pay the company).
If this value is too high, it may indicate you’re struggling to collect long-term debt, losing revenue, and at risk of not being able to cover your own bills.
10. Current Accounts Payable (CAP)
The inverse of current accounts receivable, CAP is the total amount owed to your vendors, lenders, and creditors within a specific time frame. It can be used to measure the current amounts owed by specific departments, business units, or the organization as a whole.
11. Accounts Payable Turnover (APT)
This critical finance KPI is used to track the rate at which your company pays the average amount to its creditors and suppliers within a given period. The higher the ratio, the better; a high APT ratio is a strong indicator of short-term liquidity and creditworthiness.
APT is calculated as follows:
Total Amount of Credit Purchases Made ÷ Average Accounts Payable Balance = Accounts Payable Turnover
12. Accounts Receivable Turnover (ART)
You can use this KPI to measure how effectively your company is managing credit extended to others and collecting on outstanding debts. Like accounts payable turnover, this metric measures the flow of revenue; unlike APT, however, it’s best if you keep your ART as low as possible, as it indicates a strong ability to collect debts. The lower your ART, the more revenue you have on hand to invest.
ART is calculated using a formula similar to APT:
Net Value of Credit Sales ÷ Average Accounts Receivable Balance = Accounts Receivable Turnover
13. Total Accounts Payable Processing Costs
This KPI is your total costs for processing payments and invoices in a given time period. Keeping this value low requires high process efficiency, speed, and accuracy in all your workflows.
14. Invoice Processing Cycle Time
Every invoice your accounts payable department processes comes with a price tag that goes up based on errors, delays, and extra costs like lost discounts and late fees. Trimming this KPI can lower costs and help you regain value.
15. Average Invoice Approval Cycle Time
This KPI tracks the average time required for vendor invoices to be reviewed and approved for payment. As with invoice processing time and exception rates, reducing this metric’s value can improve your average invoice processing costs.
16. Invoice Exception Rate
Tracking the bottlenecks, errors, and other problems that can prevent an invoice from being paid on time (or early!), this metric should be kept as low as possible. Every error or delay generates additional costs that raise your invoice processing price tag—and even tiny additions quickly add up when calculated over thousands of invoices.
17. Average Cost to Process an Invoice (By Type)
This particular KPI is dependent upon the overall efficiency of your invoice processing workflows, and directly affected by the sub-metrics related to average approval and processing time, as well as exceptions. Keeping this KPI’s value low helps protect not just profits and value generation, but important intangible assets like positive vendor relationships.
18. Return on Equity
This metric compares the amount of revenue your business generates to every unit of shareholder equity to determine how efficiently you’re transforming investor dollars into profits.
19. Debt to Equity Ratio
As with Return on Equity, this KPI illustrates how efficiently your company is leveraging shareholder investments. Keep this ratio as low as you can; a high debt to equity ratio indicates lost investments and mounting debt.
20. Total Cost of the Finance Function
A direct comparison of your company’s total revenue to its total cost of financial activity, this metric can provide a good general impression of how well a company is managing its finances. Generally speaking, the lower the total cost, the better.
The Three A’s Help You Optimize Your KPIs
A 2020 report from research firm Ardent Partners found that one of the ways top-performing “best in class” organizations were achieving significant value creation and competitive advantage was through the embrace of digital technologies like automation, artificial intelligence (AI), and analytics. The “Three A’s”, when introduced to a company’s workflows via an advanced procure-to-pay software solution such as PLANERGY, streamline all AP processes for a major impact on financial performance and health:
- Total data transparency and centralized data management and analysis in real time.
- Dashboards for monitoring and adjusting KPIs in response to ongoing performance tracking.
- AI-powered process automation for iterative continuous improvement of all workflows.
- Substantial improvements for best-in-class firms paying suppliers electronically:
- 65% reported greater accuracy and control over all financial processes.
- 65% reported more efficient payment processing.
- 39% reported greater ability to capture early payment discounts.
- 32% reported improved supplier relationships and reduced fraud.
- Invoicing costs six times lower than with traditional or last-gen methods.
- 300% faster invoice processing times.
- 57% lower invoice exception rates.
With Big Data taking center stage for businesses hoping to monitor and improve their financial health, investing in automation, AI, and analytics can make it easier to track and improve every KPI—and, over time, greatly enhance their financial strength and competitive prowess.
Leverage KPIs for a Stronger, More Agile Business
To compete successfully in a global market that’s more complex and interconnected than ever before, your company needs real-time access to the information that can help it take optimal advantage of new opportunities, improve business efficiency and profitability whenever possible, and navigate disasters like the COVID-19 pandemic. By using KPIs to monitor financial health and taking advantage of advanced technologies like process automation, artificial intelligence, and deep analytics, you’ll be well positioned to measure, analyze, and streamline your company’s financial performance.
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