Top 5 Financial KPIs Every Manager Should Track!

Resources are scarce. Every decision we make is a trade-off. This is true not just for individuals but also for organizations.
Every decision a manager makes has a bearing on the company's financial resources, which are always in a trade-off situation.
The ultimate goal for any organization is to create value for its customers, owners, and employees; financial performance is a good proxy for such value creation.
To contribute toward improving organizational finance performance or financial health, every manager needs to have basic training about how to interpret their financial KPIs.
Financial KPIs are financial metrics that indicate the health and efficiency of various functions such as marketing, sales, manufacturing, warehousing, operations, and customer service. CFOs and F&A leaders are finance experts who keep track of these financial metrics and prepare management reports regularly.
The basic knowledge of these key financial metrics or KPIs comes in handy during the periodic MIS meetings conducted by the CFO or finance teams.
Let's look at the top 5 financial KPIs or metrics that every manager needs to understand. 
These KPIs/ metrics are classified into various categories.

Profitability 

Profitability ratios are the financial metrics that help calculate a business's profits from sales, business operations, assets, and equity. Examples of profitability metrics are gross profit margin, EBITDA margin, operating profit margin, net profit margin, return on assets, and return on equity.

Efficiency 

Efficiency ratios are the metrics that track the effectiveness of its resources. Examples of efficiency metrics are asset turnover, inventory turnover, receivables turnover, and payables turnover.

Liquidity 

Liquidity ratio helps managers understand the company's ability to pay its short-term debts and obligations. Examples of liquidity metrics are the current ratio and quick ratio.

Solvency 

Solvency ratios are the metrics that help understand the company's ability to pay its long-term debt and obligations. Examples of solvency metrics are debt to assets ratio, ICR or interest coverage ratio, and debt to equity ratio.

Valuation 

Valuation ratios are the metrics that show the relationship between the company's share price or market value and its earnings or financial performance. Examples of valuation metrics are price-to-earnings (P/E) ratio, price-to-book value (P/B) ratio, price-to-sales, price to cash flow ratio

The Top 5 Financial KPIs to Track for Non-Finance People

All managers need not worry about tracking all the above ratios. Managers can start their finance tutorial with the following five metrics/ KPIs.

1. Revenue Growth

2. Gross Profit Margin

3. Burn Rate

4. Customer Acquisition Cost

5. Accounts Payable and Accounts Receivable

Let’s understand these 5 KPIs in detail.

Revenue Growth

As the name suggests, revenue growth is growth in revenue or sales of products or services over a set period. Revenue is also referred to as the Topline and is a result of the quantity of products/services sold multiplied by the price.

Hence, tracking the monthly/ quarterly, or annual trend can help throw light on the effectiveness of a company's product, pricing marketing, and sales strategy. Benchmarking your company's revenue growth metric with the revenue growth achieved by your main competitors and the industry leaders will help refine your sales strategies and improve your profits. Monitoring revenue growth, stagnancy, or decline of your company and your market share also helps keep track of new product launches by competitors and customer behavior shifts.

Gross Profit Margin

Subtract the cost of goods sold from the total revenue to get the gross profit for the period. When you divide the gross profit by the revenue and multiply it by 100, you will get the gross profit margin metric.

The cost of goods sold considers only direct production costs. Hence, this metric/ KPI tells us the product's profitability without considering the common overhead costs.

Gross profit margin is an indicator of the efficiency and productivity of the company's core operations. This metric helps identify inefficiencies and take corrective actions.

Burn Rate

Burn rate is the rate at which a company spends its cash to run operations. This ratio is more helpful in understanding the financial health of a startup or a new company with no revenue. It can be useful for companies that are underperforming and struggling for survival.

Burn rate is also used in companies with project-based operations. In a project management company, the project burn rate is the rate at which the project consumes the allocated budget. Project burn rate is an indicator of the financial health of a project and can be correlated to project overruns. Monitoring the burn rate helps project managers to control project budgets.

Customer Acquisition Cost (CAC)

Customer acquisition cost, or CAC, is a must-track KPI for marketing and sales managers. Customer acquisition cost is the money spent on acquiring a new customer. It is calculated by dividing the sales and marketing expenses by the total number of new customers acquired in a given period.

Marketing and sales costs will include all the costs associated with the company website, SEO, Google ads, digital marketing and traditional marketing, and inbound and outbound calling. Often, a company outsources these digital marketing activities to third-party agencies.

Hence, tracking CAC becomes a critical metric for evaluating the performance of these marketing agencies, especially if their fees are success-based.

Accounts Payable and Accounts Receivables

Accounts payable indicate the money the company owes to its suppliers or vendors and are short-term business liabilities. Accounts receivables are money owed to the company by the buyers during a sale on credit. Accounts receivable are short-term assets.

A business needs to balance payables and receivables to be profitable. A thorough analysis of the accounts receivable will help design buyers' credit and sales strategies, and accounts payable improve purchase function. Identifying inefficiencies related to payables and receivables also helps improve invoicing, bill processing, and other accounting and purchase department processes.

More KPIs or metrics need to be explained to a company's managers and decision-makers. However, merely understanding these KPIs might be inadequate to transform your organization's financial performance. The best way to improve financial health is to reach out to a financial expert. 

We at CFO Bridge help medium-sized businesses and startups improve their financial health and performance and survive and shine in the competitive business landscape. Explore how we helped some of our clients and read their testimonials on our website, www.cfobridge.com.

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