The Essential KPIs Every Business Should Track for Success
Business success is all about setting goals and measuring progress toward achieving them. To measure progress, businesses track different metrics or KPIs (Key Performance Indicators). These KPIs help businesses understand their position concerning their goals. But with so many different metrics to track, not knowing where to start can be overwhelming. That is why we have compiled a comprehensive guide on the essential key performance indicators (KPIs) that every business should track for success. Whether you are a small startup or an established enterprise, these KPIs will help you stay on top of your game and ensure you are moving in the right direction toward growth and profitability. You can track your KPIs with the help of your in-house accountants or with the help of financial reporting services. However, understanding the KPIs is crucial before you decide on how to manage the process. So, let us get started.
What are KPI reports?
KPIs, or Key Performance Indicators, refer to metrics used to measure a business’s progress and success in achieving predetermined goals. They provide a way to track whether or not you are meeting your targets and, if necessary, make changes to improve your performance. KPI reports are prepared for every business area, from finance and sales to customer satisfaction and employee productivity. Tracking KPIs also helps businesses prepare financial reports accurately. Having timely and accurate financial reporting is important as it provides business owners and managers with valuable insights into the health and performance of their company. By regularly monitoring KPIs, businesses can make data-driven decisions to improve their operations and achieve their targets.
An effective business tracks a variety of KPIs to measure success and identify areas for improvement. While different businesses will have unique KPIs based on their specific goals and objectives, there are some essential KPIs that every business should track. Businesses can partner with expert outsourced financial reporting services to enhance the efficiency of the process and get the financial reports prepared based on the KPIs.
What are the top KPIs businesses should track?
The most important KPIs for your business will depend on your specific goals and objectives. Let us look at these different important KPIs that are based on different business functions and must be tracked by every business.
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Financial KPIs:
In order to understand a business’s financial position, it is important to accurately read and analyze the financial statements and measure the KPIs based on the analysis. There are a number of financial KPIs that every business should track for success. Here are a few of the essential ones:
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Current Ratio
The current ratio is a liquidity metric that measures a company’s ability to pay its short-term liabilities using its short-term assets. It is calculated by dividing a business’s total current assets by its current liabilities. A high current ratio indicates that a company has enough liquid assets to meet its immediate obligations, while a low current ratio suggests otherwise. Generally, companies aim for a 2:1 or higher current ratio, i.e., 2 times more current assets than liabilities, as it indicates good financial health.
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Gross Profit Margin
Gross profit margin measures the profitability of a business. To calculate gross profit margin, you need to subtract the cost of goods sold (COGS) from total revenue and then divide this figure by total revenue. Since different industries have different levels of COGS depending on their nature and complexity, it is important to benchmark your gross profit margin against competitors within your specific market segment.
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Net Profit
Net profit is one of the most important financial KPIs for any business. It represents the amount of profit a company earns after all expenses, including taxes and interest payments, have been deducted from its revenue. Businesses must regularly monitor their net profit margins to identify trends and address potential issues early on.
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Operating Cash Flow
Operating cash flow is a crucial financial KPI used by businesses to measure the amount of cash generated by regular or normal business operations. It helps businesses determine how much cash they have available for reinvestment, debt repayment, and other expenses. By analyzing their operating cash flows regularly, businesses can identify potential issues with their spending patterns and make necessary adjustments before things get out of control. Ultimately improving their overall financial health as well as ensuring sustainability over time.
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Working Capital Ratio
It is a financial KPI that calculates the amount of working capital available to meet the current obligations of the business. It is calculated by dividing working capital by current liabilities. Working capital is the difference between current assets and current liabilities, representing the funds available for day-to-day operations. This ratio is essential because it shows the amount of cash available for daily operations. A healthy working capital ratio ensures that a business can fund its day-to-day expenses, such as payroll and inventory, without facing any financial constraints. It also indicates whether a company has enough liquidity to cover short-term debts.
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Return on Equity
Return on Equity (ROE) measures the profit generated by a company from its shareholders’ investments. It indicates how much profit has been made for each dollar of shareholder investment in the business. A high ROE value signifies that the company is utilizing its equity efficiently to generate profits. Investors usually consider this ratio when deciding whether or not to invest in a particular company. However, it is important to note that high ROEs may also indicate excessive leveraging- borrowing money to fund operations and increase profitability at the expense of shareholders’ equity. Therefore, analyzing other financial ratios alongside ROE is essential before making any investment decision.
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Return on Investment
Return on Investment (ROI) is a fundamental financial key performance indicator that measures the profitability of an investment. ROI is expressed as a percentage, representing the ratio between the net profit generated by an investment and the cost of that investment. Companies need to understand how much return they are getting on their investments so they can adjust accordingly if necessary. However, ROI should not be used in isolation but rather as part of a comprehensive set of KPIs used by companies in evaluating performance across various areas within their organization.
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Accounts payable turnover
Accounts payable turnover is a financial KPI that measures the efficiency of a company in paying its suppliers and creditors. It indicates how many times a company has paid off its accounts payable over a certain period, usually annually. This metric helps companies to assess their cash flow and liquidity. Typically, suppliers prefer to work with businesses with a high accounts payable turnover since it signals good financial health and reliability. Additionally, investors also look at this metric when analyzing investment opportunities as they can use it as an indicator of operational effectiveness.
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Accounts receivable turnover
Accounts receivable turnover measures how efficiently a company collects payments from its customers. It represents the number of times a company converts its accounts receivable into cash during a specific period, usually one year. As such, it helps track changes in customer payment behavior over time while providing insights into credit policies’ effectiveness. Maintaining healthy account receivables turnover is essential for businesses as it ensures steady revenue streams and improved liquidity positions.
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Debt-to-equity ratio
The debt-to-equity ratio is another essential financial KPI that helps businesses and investors gain insight into a company’s financial health. This metric compares a company’s total debt to its shareholders’ equity, providing an understanding of how much leverage the company uses to finance its operations. A high debt-to-equity ratio can be concerning, as it implies that a significant portion of the organization’s capital comes from borrowed funds. Companies with higher ratios are often considered riskier, as they may face difficulties repaying their debts or obtaining additional financing during economic downturns.
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Operational KPIs:
There are a number of operational KPIs that every business should track for success. By doing so, businesses can keep tabs on how efficient their day-to-day operations are and where improvements can be made. Operational KPIs are some of the most important metrics to track as they help determine the state of the business operations and the areas where improvements can be made. Hiring an outsourced KPI services provider helps enhance the accuracy of the metrics and financial reports. Some key operational KPIs to track include:
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Sales per employee
This KPI measures the average sales generated by each employee. It is a good way to gauge the productivity of your sales team and identify any underperforming members.
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Cost per unit
This KPI helps you track the costs associated with producing each unit of your product or service. By keeping tabs on this metric, you can ensure that your prices align with your production costs.
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Delivery times
This KPI tracks the average time it takes for your company to deliver its products or services. It can indicate whether your processes are efficient and customers are satisfied with them.
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Customer satisfaction
This KPI is essential for tracking how many customers are satisfied with your company’s products and services. Poor customer satisfaction can hurt sales, so you should regularly measure customer satisfaction levels and take steps to improve them if necessary. Customer satisfaction can be related to operational KPIs in the sense that these metrics impact the overall customer experience. If operational processes are streamlined, timely, accurate, and efficient, it is likely to positively affect customer satisfaction. Therefore, monitoring and improving these operational KPIs can indirectly result in higher customer satisfaction ratings.
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Customer KPIs:
There are a lot of KPIs that businesses can track to gauge their success. But which ones are the most essential? Here are some customer KPIs that every business should include in its financial analysis report:
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Customer acquisition rate
It measures how quickly your business is acquiring new customers. Keeping tabs on this number will help you ensure that your marketing and sales efforts are effective.
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Customer retention rate
This KPI measures how many customers stick around after their first purchase. A high retention rate means your customers are happy with your product or service, while a lower one states otherwise.
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Customer lifetime value
This measures the total amount of money a customer spends with your business over the course of your relationship. A higher lifetime value means that your customers are loyal and engaged.
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Customer satisfaction rating
It measures how satisfied your customers are with your product or service. Keeping tabs on this number will help you identify areas where you need to make improvements. The customer satisfaction rating is a specific KPI within the customer KPI category that directly measures customers’ satisfaction levels with a company’s products, services, or interactions. It is typically obtained through surveys, feedback, or ratings provided by customers themselves. This KPI provides a direct measurement of customer satisfaction and serves as a vital indicator of how well a company is meeting customer expectations and needs.
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Employee KPIs:
Every business should track a few key employee KPIs for success. By tracking these KPIs, you will be able to identify problem areas and take steps to improve them.
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Employee satisfaction
This is probably the most important employee KPI to track. If your employees are unhappy, they are less likely to be productive or stay with your company for long. There are a number of ways to measure employee satisfaction, such as surveys, focus groups, and one-on-one interviews.
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Employee Turnover Rate
Another important employee KPI is turnover rate, which measures the percentage of employees who leave your company each year. A high turnover rate can be expensive and disruptive to your business, so keeping track of this KPI and identifying any trends is important.
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Productivity
Tracking productivity is essential for any business, but it can be especially important for businesses with remote or distributed teams. There are a number of productivity metrics you can track, such as output per hour, average response time to customer inquiries, or sales per employee.
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Retention rate
The retention rate is an important employee KPI that measures the percentage of employees you are able to retain every year. A high retention rate signals that your company is providing a good work environment for its employees. You can track your company’s retention rate by measuring the length of time each employee stays with the company or by tracking how many accept job offers elsewhere.
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Conclusion
Regular financial analysis reporting is important for a business owner, but understanding which KPIs are important and how to track them effectively can be difficult. The above-mentioned compilation of top KPIs is a guide to understanding what businesses need to track to efficiently understand and manage their functions to accomplish their goals. By utilizing these key performance indicators in your strategy, you can gauge progress and determine potential areas for improvement within your organization. Use these metrics properly to ensure your business’s success!
However, going through all your financial data and statements to conduct financial analysis and measure numerous KPIs can be exhausting for the in-house accountant as it requires too much time and effort. So, hiring outsourced financial reporting services providers is one of the best business choices. In case you want to delegate your financial analysis and reporting to a third-party expert and focus on other important business functions, you can contact us. At Whiz Consulting, we help businesses manage their finances by handling numerous accounting tasks, including measuring KPIs through the expertise of our experienced professionals. So, make the right choice today and take your business to new heights.