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Watch out for these financial KPIs in 2024

financial KPIs

 

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Business finance, admittedly, can be a complex domain for beginners. However, the foundations of financial management are critical for the stability and growth of any business. Plus, the real power of monitoring the right financial key performance indicators (KPIs) helps business owners drive organizational growth and strategic decisions.

Effective financial management is also critical to making sure your business stays successful: 18% of small businesses close down within their first year of operation, and up to 65% close by their tenth year. Being savvy with money can help put you on the right path.

“KPIs aren’t merely tools for tracking finances but are essential for managing them effectively, leading to better business outcomes,” said Credibly Founder Ryan Rosett.

In this blog, we’ll explore the core tenants of business KPIs, some of the most important financial metrics, and how working with the right alternative lender can help you ensure healthy financial KPIs for your business.

 

What are KPIs in business?

Financial KPIs are a core, critical way to understand your business’s financial health. Derived from accounting data, they act like dashboard indicators, providing a high-level overview of financial outcomes. Focused on specific financial values or ratios, these KPIs fall into five main categories.

1. Valuation KPIs provide insight into the market’s view of a company’s worth. Earnings per share reflect the profitability on a per-share basis, and price to earnings ratio compares the company’s current share price to its per-share earnings.

2. Profitability KPIs gauge how well a company generates profit. This includes gross profit margin, showing the percentage of revenue exceeding the cost of goods sold, and net profit margin, indicating the percentage of revenue left after all expenses.

3. Efficiency KPIs highlight how effectively a company uses its assets. Inventory turnover shows how often inventory is sold and replaced, while accounts receivable turnover indicates the efficiency in collecting receivables.

4. Liquidity KPIs measure a company’s ability to pay short-term obligations. The current ratio compares current assets to current liabilities, and the quick ratio assesses the ability to meet short-term liabilities with liquid assets.

5. Leverage KPIs assess the degree of a company’s financial leverage. Debt to equity ratio compares the company’s total liabilities to shareholders’ equity, and return on equity measures profitability relative to equity.

 

How do you choose the right financial KPIs to monitor?

When monitoring financial KPIs, it’s vital to ensure they indicate true performance and possess several key characteristics. Each KPI should be easily quantifiable; it must present clear, measurable data. Connection to the company’s objectives and strategy is essential.

You also need to be able to understand the information these KPIs give you so you can make informed decisions. Your KPIs should also provide up-to-date and precise data to be effective, and should encompass insight into  different aspects of your business.

 

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The top 7 financial KPIs you should measure in 2024

1. Net profit margin

This offers a comprehensive view of a business’s overall profitability. It’s an all-encompassing ratio that takes into account all costs associated with the business, including the Cost of Goods Sold (COGS), operating expenses, interest, and taxes. This KPI also helps you assess the effectiveness of your expense management and your ability to maximize profit margins.

To calculate your net profit margin:

(Revenue – Costs)/revenue×100

 

2. Gross profit margin

This financial KPI measures the core profitability and efficiency of your business. Unlike net profit margin, the gross profit margin specifically focuses on the efficiency of sales and production processes, excluding external factors like operating expenses, interest, and taxes. This is also useful for analyzing trends in profitability and for making comparisons within the industry.

To calculate your gross profit margin:

(Revenue−cost of sales)/Revenue × 100

 

3. Working capital

Working capital is a vital KPI for assessing a company’s liquidity, short-term financial health and operational efficiency. This measure also provides insight into the operating liquidity available for a business’s day-to-day operations.

To calculate your working capital:

Current assets−current liabilities

 

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4. Sales growth rate

This tracks the increase in sales over a specific period. This measure is crucial for evaluating the effectiveness of a company’s sales strategy. Consistent tracking of your sales growth rate is also fundamental for strategic planning, allowing you to make necessary adjustments in sales tactics to drive growth and increase profitability.

To calculate your sales growth rate:

(Current net sales−Previous net sales)/Previous net sales × 100

 

5. Debt-to-equity ratio (DER)

This measures your company’s financial leverage and serves as an indispensable metric for finance departments, especially when making crucial investment decisions. For businesses seeking loans or loan extensions, the DER is particularly critical as it provides potential lenders with a clear view of the company’s debt management strategies.

To calculate your DER:

Total liabilities/Shareholders’ equity

 

6. Accounts receivable turnover

This KPI plays a crucial role in assessing the efficiency of a company in collecting payments from its customers. A high turnover ratio indicates that a company is efficient in managing its cash flow and collecting payments from customers promptly. Conversely, a low turnover ratio can be a warning sign of slow-paying customers.

Regularly monitoring this KPI is essential if you’re looking to maintain stable cash flow and identify potential issues in your credit control and customer payment processes.

To calculate your accounts receivable turnover:

Net annual credit Sales / Average accounts receivable

 

7. Seasonality

Monitoring the impacts of seasonality is just as important for understanding your business’s financial performance. Seasonality helps in isolating specific variables that affect financial outcomes, thereby providing a clearer understanding of a company’s financial status.

Tip: It’s important to note that in the context of seasonality, there are no absolute ‘good’ or ‘bad’ KPIs. Instead, the focus should be on understanding the trends and patterns that these seasonal fluctuations reveal.

 

Comparing seasonal financial performance with past years or industry competitors is a key part of using this KPI. It provides valuable context, helping you not only gauge your own performance over time but also to understand your standing relative to the competition.

 

What to look for in healthy financial KPIs

 

Financial KPI What to look for Why it’s important
Net profit margin Higher percentages, consistent growth over time Indicates overall profitability and efficiency
Gross profit margin Stable or increasing margins Reflects core business efficiency and pricing strategy
Working capital Positive figures, sufficient to cover short-term obligations Ensures liquidity for daily operations
Debt-to-equity ratio Lower ratios, indicating less reliance on debt for financing Shows a healthy balance between debt and equity financing
Accounts receivable turnover High turnover, indicating efficient collection from customers Ensures steady cash flow and effective credit management

 

How can an alternative lender help?


Additional financing can help bridge the gap when you’re running low on working capital or new opportunities surface.

Traditional banking routes often come with lengthy processes and strict requirements, which can be challenging for many businesses, especially small and mid-sized ones. This is where an alternative lender steps in, offering a more accessible and flexible lending option.

Alternative lenders offer short-term funding solutions that are tailored to the unique needs of each business. With this approach, you can secure funding quickly, often in as little as just a few days, which is crucial for addressing immediate financial needs or capitalizing on timely opportunities.

An alternative lender also offers less stringent eligibility criteria compared to traditional banks to make it easier for businesses with varying credit histories and financial backgrounds to access funding.

Plan for the future with Credibly.

We recognize the unique financial needs of your business. Although we don’t provide mezzanine financing, we’re equipped to help you assess if this is the right path for you.

Our commitment is to understand your business’s potential beyond just the numbers. We’re here to offer insights and guidance—not just financing.
If you’re considering your next financial move and wondering if mezzanine financing fits your growth strategy, let’s discuss your options.

With experience supporting over 30,000 businesses, we’re prepared to help you make an informed decision.

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