Quantifiable metrics—known as key performance indicators (KPIs)—are utilized to track and evaluate an organization’s progress toward its strategic objectives. These KPIs are not merely figures; rather, they convey the story of a company’s performance. For any business that wishes to grow, comprehending how KPIs relate to the industry, company, and individual departments is critical. Business leaders are increasingly aware that this data can assist them in making more informed decisions.
With the vast amount of information accessible today, decision-makers may feel overwhelmed. Thus, we’ve distilled the most commonly used KPIs down to 20 that are pertinent to the majority of businesses. This guide will highlight the significance of KPIs, the traits of an effective KPI, and provides a catalogue of popular financial and operational KPIs.
Popular Financial KPIs
Although organizations must understand the factors that will contribute to their success and identify the industry-specific KPIs that are relevant to them, there are also metrics that are applicable to most companies.
Let’s take a look at 10 financial KPIs that are commonly used by expanding businesses.
1. Gross Profit Margin
The first KPI is gross profit margin, which calculates the profit generated from product sales after subtracting the cost of goods sold (COGS).
A higher gross profit margin suggests your company is effectively transforming its product or services into profits. COGS includes the total expenses incurred in producing a product or service, such as materials and labor, while net sales represent the revenue after deducting returns, discounts, and allowances.
Gross profit margin = Net sales – Cost of goods sold / Net sales x 100
2. Operating Profit Margin
Operating profit margin is a KPI that displays the percentage of profit generated by a company through its operations before deducting taxes and interest.
An improvement in operating margins may suggest enhanced management and cost controls within the company. Earnings before interest and taxes (EBIT) can be calculated by subtracting operating expenses from gross profit.
Operating profit margin = Gross profit – Operating expense / Revenue x 100
3. Operating Cash Flow
The next KPI you should look at is operating cash flow (OCF), which represents the cash generated by your company through its routine operations. This metric provides insight into how much cash the business can expend in the near term and whether it needs to curtail its expenses.
OCF can also uncover problems such as customers delaying payment of their bills or failing to pay them at all.
Operating cash flow = Net income + Non-cash expenses – Increase in working capital
4. Working Capital Ratio
The working capital ratio is a KPI that evaluates the liquidity of a company to ascertain whether it can meet is financial obligations. A ratio of 1 or more indicates your company’s assets surpass the value of its liabilities.
Typically, companies aim for a ratio of 1.5 – 2; a ratio below 1 indicates potential financial difficulties in the future. This KPI is also referred to as the current ratio.
Working capital ratio = Current assets / Current liabilities
5. Quick Ratio
The acid test ratio (or quick ratio) is a KPI that determines a company’s ability to meet its short-term financial obligations by assessing whether it possesses sufficient assets to pay off its current liabilities.
The quick ratio is expresses as a numerical value, with a ratio of 1.0 signifying the company possesses enough assets to cover its liabilities. A quick ratio below 1 may suggest the company’s business model is not feasible.
Quick ratio = (Cash + Marketable securities + Accounts receivable) / Current liabilities
6. Return on Assets (ROA)
Return on assets is a KPI that gauges a business’s profitability relative to its total assets. This ROI metric demonstrates how proficiently a company is using its assets to generate earnings.
A greater ROA indicates your business is operating more efficiently. To compute average total assets, add up all assets at the end of the current year and the prior year and divide the sum by two.
ROA = Net income / Average total assets
7. Days Payable Outstanding (DPO)
Days payable outstanding (DPO) is the mean duration a company takes to pay its creditors and suppliers. This ratio aids the business in assessing its cash flow management and whether it’s availing discounts for prompt or timely payments to vendors.
To determine DPO, begin with the average accounts payable for a specific period (such as a month, quarter, or year).
Average accounts payable = Accounts payable balance at beginning of period – Ending accounts payable balance / 2
DPO = Average accounts payable / Cost of goods sold x Number of days in accounting period
8. Days Sales Outstanding (DSO)
Days sales outstanding (DSO) represents the average time required for customers to pay a company for the gods and services they received.
A higher DSO signifies a company takes longer to receive payments, which can lead to cash flow issues. As a general rule, the lower the DSO, the more favorable the situation is for your business.
Days sales outstanding = Accounts receivable for a given period / Total credit sales x Number of days in period
9. Cash Runway / Burn Rate
Cash runway is the period of time during which a company can continue operating before running out of cash, based on its current available funds and monthly expenditures.
This metric enables your business to determine when it needs to reduce expenses or obtain additional funding. If the cash runway is decreasing, it indicates your company is spending more than it can afford.
10. Budget vs. Actual
The budget vs. actual metric compares a company’s actual spend or sales in a specific area to the budgeted amounts. It can be used to compare both revenue and expenses, allowing small business leaders to identify areas where they’re overspending and need further attention. This “budget variance analysis” also reveals areas of the business that outperformed expectations.
By examining both budgets and expenses, this metric provides invaluable insights to help businesses improve their financial performance.
Budget variance percentage = Actual / Forecast – 1 x 100
Common Operational KPIs
Operational KPIs show how well your business is running. Improved internal business processes and metrics lead to more satisfied customers, which is imperative for growing businesses.
11. Cost Per Unit
The cost per unit represents the cost incurred by a company to produce or acquire a single unit of a product. This KPI is particularly useful for businesses that sell or manufacture large quantities of a single product.
By determining the cost per unit, companies can evaluate the cost-effectiveness of their production processes, establish product pricing strategies, and predict when they will become profitable.
Cost per unit = (Fixed costs + Variable costs) / Number of units produced
12. Lead Time
Lead time is the duration between the initiation and completion of any process in the supply chain, such as the time taken to receive a product from a supplier after placing an order or the duration of the production process. This metric is crucial for evaluating the efficiency of the supply chain and its impact on inventory management and customer satisfaction.
A longer lead time necessitates higher inventory levels to meet customer orders. The lead time formula can be adapted to calculate the duration for customer lead time, supplier lead time, or production lead time.
Cumulative lead time = Order process time + Production lead time + Delivery lead time
13. Cash-to-Cash Cycle Time
Cycle time measures the time between paying suppliers for materials and receiving payment from customers for the final product.
A shorter cycle time is preferable to maintain good cash flow. This metric can help identify potential issues that may affect cash flow. While cycle time varies depending on the product and customer base, efficient companies aim for a cash-to-cash cycle time of less than a month.
Cash-to-cash cycle time = Receivable days + Inventory days – Payable days
14. Inventory Turnover Rate
The inventory turnover rate, also referred to as inventory turnover ratio or inventory turn, is the number of times a company replaces and sells its inventory within a specific period—typically a year.
By using this ratio, your business can assess if you’re holding excess inventory compared to what’s selling. The inventory turnover rate is a measure of how efficiently a company sells its inventory.
Inventory turnover rate = Cost of goods sold / Average inventory
15. Sell-Through Rate
Sell-through rate compares the amount of inventory sold to the amount of inventory received from a manufacturer, indicating how effectively inventory is being sold. It’s an essential metric for organizations, as it helps identify the rate of inventory turnover.
A higher sell-through rate is favorable, as it suggests products are selling quickly; a lower sell-through rate indicates excess inventory is being held, which can result in additional holding costs.
Sell-through rate = Number of units sold / Number of units received x 100
16. Gross Margin Return on Investment (GMROI)
The gross margin return on investment (GMROI) is a metric that calculates the profitability of a company’s inventory investment. It provides insights into the performance of specific inventory items, highlighting strong and weak performers.
A GMROI of 200 to 255 is typically considered a solid performance benchmark.
Gross margin return on investment = Gross profit / Average inventory cost x 100
17. Lost Sales Ratio
The lost sales ratio is calculated by comparing the number of days a particular product is out of stock to the anticipated sales rate for that product.
This metric can help companies determine the financial loss resulting from inadequate inventory levels or sudden spikes in demand that result in stockouts. As a percentage, your company should strive to achieve the lowest possible lost sales ratio.
Lost sales ratio = (Number of days product is out of stock / 365) x 100
18. On-Time Delivery Rate
The on-time delivery rate is the percentage of customer orders that are delivered on or before the scheduled delivery date. This key performance indicator is used to measure the efficiency of the supply chain.
A low on-time delivery rate may indicate slow processes in the supply chain, shipping bottlenecks, or slow delivery methods. Such delays can lead to customer dissatisfaction and a decrease in repeat business.
On-time delivery date = (Total orders – Late orders) / total orders x 100
19. On-Time Shipping Rate
The on-time shipping rate measures the frequency of orders shipped to customers within the promised shipping window.
This metric is valuable for evaluating the effectiveness of your order fulfillment and shipping procedures. Additionally, it can help you determine appropriate on-time delivery benchmarks for different products.
On-time shipping rate = Number of items shipped on time in a period / Total items shipped on time in a period / total items shipped in a period x 100
20. Perfect Order Rate
The perfect order rate is a metric that measures the percentage of orders a company ships without any issues, including delays, inaccuracies, or damage.
While most companies strive for a perfect order rate of close to 100%, the achievable rate varies depending on the organization. This metric is closely associated with customer satisfaction and operational efficiency.
Perfect order rate = [(Number of orders delivered on time / Total number of orders) x (Number of orders complete / Total number of orders) x (Number of orders damage free / Total number of orders) x (Number of orders with accurate documentation / Total number of orders)] x 100
Get the full guide: 20 KPIs Every Growing Business Should Track.
Work with MIBAR to Track These Tops KPIs
Tracking key performance indicators (KPIs) is critical to monitor company health, measure progress, and adjust goals or targets. For expanding businesses, understanding financial KPIs is important to ensuring long-term sustainability.
How does your business track these KPIs?
Tracking even basic metrics like revenue, expenses and income can become cumbersome with spreadsheets or other manual methods. It’s difficult to keep all this information up to date, especially as a company grows and its transaction volume increases. That leads to inaccurate information and, consequently, a number of other problems that could inflict lasting damage.
Manually calculating more complex metrics, such as some of the financial and operational KPIs discussed above, is even more challenging and error-prone.
Leading business management platforms like NetSuite have all the data needed to calculate any and all KPIs your business might want to track, displaying all this information in dashboards that update in real time.
To gain a better understanding of how KPIs can help your business, or to learn more about a solution like NetSuite, contact MIBAR. Our technology consulting firm can help you optimize your business processes and enhance your decision-making capabilities. Don’t hesitate to take action and reach out to MIBAR when you’re ready to take your business to the next level!