Discover the most essential financial KPIs for business growth.

Understanding Financial KPIs: Key to Business Success

Understanding financial KPIs is key to business success, helping organisations track profitability, liquidity and operational efficiency. Metrics like gross profit margin, operating cash flow and working capital ratio provide vital insights into financial health. NetSuite’s cloud-based financial management system enhances KPI tracking with real-time data and advanced analytics, enabling informed strategic decisions. By monitoring the right financial KPIs, businesses can improve forecasting, manage cash flow effectively and optimise resources for sustainable growth. Investing in robust financial management tools ensures companies stay ahead in an ever-evolving market.

10 Popular Financial KPIs Used by Growing Businesses

While organisations need a firm grasp of what will make them successful and which industry-specific KPIs matter to them, there are metrics relevant to most businesses. Here are 10 popular financial KPIs used by growing businesses.

1. Gross Profit Margin

Gross profit margin measures the amount of money left over from product sales after subtracting cost of goods sold (COGS). A higher gross profit margin indicates the company is efficiently converting its product or service into profits. The cost of goods sold is the total amount to produce a product or service, including materials and labour. Net sales are revenue minus returns, discounts and sales allowances.

Formula: Gross profit margin = (Net sales – Cost of goods or services sold) / Net sales × 100

2. Operating Profit Margin

Operating profit margin shows the percentage of profit a company makes from operations before subtracting taxes and interest. Increasing operating margins can indicate better management and cost controls within a company. Gross profit minus operating expenses is also known as earnings before interest and taxes (EBIT).

Formula: Operating profit margin = (Gross profit – Operating expenses) / Revenue × 100

3. Operating Cash Flow

Operating cash flow (OCF) is the amount of cash a company generates through typical operations. This metric can give a business a sense of how much cash it can spend in the immediate future and whether it should reduce spending. OCF can also reveal issues like customers taking too long to pay their bills or not paying them at all.

Formula: Operating cash flow = Net income + Non-cash expenses – Increase in working capital

4. Working Capital Ratio

Working capital ratio measures the liquidity of a business to determine if it can meet its financial obligations. A working capital ratio of 1 or higher means the business’s assets exceed the value of its liabilities. Companies often target a ratio of 1.5-2, and anything below 1 signals future financial problems. The working capital ratio is also known as the current ratio.

Formula: Working capital ratio = Current assets / Current liabilities

5. Quick Ratio

Quick ratio, also called the acid test ratio, measures whether a business can fulfil its short-term financial obligations by evaluating whether it has enough assets to pay off its current liabilities. Quick ratio is written as a number, with a ratio of 1.0 meaning a company has just enough assets to cover its liabilities. Anything below 1 could mean the company’s business model is not viable.

Formula: Quick ratio = (Cash + Marketable securities + Accounts receivable) / Current liabilities

6. Return on Assets (ROA)

Return on assets measures the profitability of a business compared to its total assets. This return on investment (ROI) metric shows how effectively a company is using its assets to generate earnings. A higher ROA means a business is operating more efficiently. To calculate average total assets, add up all assets at the end of the current year plus all the assets from the prior year and divide that by two.

Formula: ROA = Net income / Average total assets

7. Days Payable Outstanding (DPO)

The average number of days it takes a company to make payments to creditors and suppliers is days payable outstanding. This ratio helps the business see how well it’s managing cash flow, and whether it’s taking advantage of discounts for early or on-time payments from vendors.

Formula: DPO = Average accounts payable / Cost of goods sold × Number of days in accounting period

8. Days Sales Outstanding (DSO)

This metric shows how long it takes, on average, for customers to pay a company for goods and services. A higher DSO indicates a company takes longer to get paid, which can lead to cash flow problems. Generally speaking, the lower your DSO, the better.

Formula: Days sales outstanding = Accounts receivable for a given period / Total credit sales × Number of days in period

9. Cash Runway/Burn Rate

Cash runway shows how long a company has before it runs out of cash based on the money it currently has available and how much it spends per month. This metric helps businesses understand when they need to cut back spending or get additional funding. If your cash runway shortens over time, it’s a sign your company is spending more money than it can afford to.

Burn rate measures how much money a company spends over a certain period (usually monthly) and is frequently used by investor-backed startups that lose money in their early days.

Formula: Monthly burn rate = Monthly expenses – Monthly revenue

Formula: Cash runway = Cash balance / Monthly burn rate

10. Budget vs. Actual

Just as it sounds, budget vs. actual compares a company’s actual spend or sales in a certain area against the budgeted amounts. Although budgets and expenses are related, budget vs. actual can be used to compare both revenue and expenses. This “budget variance analysis” helps small business leaders identify areas of the business where they’re overspending that may need further attention. It also reveals areas of the business that outperformed expectations.

Formula: Budget variance percentage = (Actual / Forecast − 1) × 100

Conclusion

Tracking financial KPIs is crucial for business success, offering insights into profitability, liquidity and efficiency. Key metrics like gross profit margin, operating cash flow and return on assets help businesses assess financial health and optimise decision-making. Understanding days sales outstanding and burn rate ensures effective cash management. By leveraging these financial KPIs, organisations can enhance forecasting, reduce risks and align resources for growth. NetSuite cloud-based financial management streamlines KPI tracking, providing real-time data and advanced analytics. Businesses that focus on these essential metrics will be better equipped to navigate challenges and drive long-term profitability.