Financial key performance indicators (KPIs) are select metrics that help managers and financial specialists analyze the business and measure progress toward strategic goals. A wide variety of financial KPIs are used by different businesses to help monitor their success and drive growth. For each company, it’s essential to identify KPIs that are the most meaningful to its business.
The following overview of 30 KPIs is designed to help leaders choose the KPIs that make the most sense for their organizations in the year ahead.
What Are KPIs?
KPIs are metrics that provide insights into the underlying financial and operational strength of a business. They can be based on any kind of data that is important to a company, such as sales per square foot of retail space, click-through rate for web ads or accounts closed per salesperson. Many KPIs are ratios that highlight important relationships in data, such as the ratio of profit to revenue or the ratio of current assets to current liabilities. A single KPI measurement can provide a useful snapshot of the business’s health at a specific point in time.
KPIs are even more powerful when they are used to analyze trends over time, to measure progress against targets or to compare the business with other, similar companies. Their value expands further when businesses consider them alongside other meaningful KPIs to create a more complete view of the business.
What Is a Financial KPI?
Financial KPIs are high-level measures of profits, revenue, expenses or other financial outcomes that specifically focus on relationships derived from accounting data — and they’re almost always tied to a specific financial value or ratio. Most KPIs fall into five broad categories based on the type of information they measure:
- Profitability KPIs, such as gross profit margin and net profit margin.
- Liquidity KPIs, such as current ratio and quick ratio.
- Efficiency KPIs, such as inventory turnover and accounts receivable turnover.
- Valuation KPIs, such as earnings per share and price to earnings ratio.
- Leverage KPIs, such as debt to equity and return on equity.
Why Are Financial Metrics and KPIs Important to Your Business?
Like the indicators and warning lights displayed on a vehicle’s dashboard, financial KPIs enable business leaders to focus on the big picture, helping them steer the company and identify any pressing issues without getting mired in the details of what goes on under the hood. These snippets of information can show when operations are running smoothly and when there are significant changes or warning signs. KPIs can also be used to help manage the company to achieve specific goals.
Which KPIs Are Best?
For any business, the best KPIs help companies determine what they're doing well and where they need to improve. While the actual metrics will vary from company to company, automated KPIs are the best way to track performance. After selecting a set of KPIs that matches your business priorities, you can generally automate their calculation and have them updated in real time by integrating the company’s accounting and ERP systems. This ensures the KPIs reflect the current state of the business and are always calculated the same way.
Automating KPIs is important for companies of all sizes. It means small businesses can direct more of their resources to analyzing KPIs instead of expending effort — and money — to create them. Larger enterprises can also better manage voluminous data this way than by using error-prone spreadsheets, and they can achieve better consistency across business units.
Defining the Right KPIs for Your Business
Determining the most useful and meaningful KPIs for your business can be challenging. The KPIs you choose will depend on your company’s goals, business model and specific operating processes. Some KPIs are almost universally applicable, such as accounts receivable turnover and the quick ratio. Other KPIs differ by industry. For example, manufacturers must monitor the status of their inventory, while services businesses might focus on measuring revenue per employee when evaluating efficiency.
30 Financial Metrics and KPIs to Measure Success in 2021
Measuring and constantly monitoring KPIs are best practices for running a successful business. The list below describes 30 of the most commonly used financial metrics and KPIs, and you can find formulas and more information on each below.
- Gross Profit Margin
- Return on Sales (ROS)/Operating Margin
- Net Profit Margin
- Operating Cash Flow Ratio (OCF)
- Current Ratio
- Working Capital
- Quick Ratio/Acid Test
- Gross Burn Rate
- Current Accounts Receivable
- Current Accounts Payable
- Accounts Payable Turnover
- Average Invoice Processing Cost
- Days Payable Outstanding
- Accounts Receivable Turnover
- Days Sales Outstanding (DSO)
- Inventory Turnover
- Days Inventory Outstanding (DIO)
- Cash Conversion Cycle
- Budget Variance
- Budget Creation Cycle Time
- Line Items in Budget
- Number of Budget Iterations
- Payroll Headcount Ratio
- Sales Growth
- Fixed Asset Turnover
- Return on Assets (ROA)
- Selling, General and Administrative Ratio (SGA)
- Interest Coverage
- Earnings Per Share (EPS)
- Debt-to-Equity Ratio
Gross Profit Margin: This is an intermediate — but critical — measure of the profitability and efficiency of the company’s core business. It’s calculated as gross profit divided by net sales, and is usually expressed as a percentage. Gross profit is net sales minus cost of goods sold (COGS), which is the direct cost of producing the items sold. Calculating profit as a percentage of revenue makes it easier to analyze profitability trends over time and to compare profitability with other companies. The formula for calculating gross profit margin is:
Gross profit margin = (Net sales – COGS) / Net sales x 100%
Return on Sales (ROS)/Operating Margin: This metric looks at how much operating profit the company generates from each dollar of sales revenue. It is calculated as operating income, or earnings before interest and taxes (EBIT), divided by net sales revenue. Operating income is the profit a company makes on sales revenue after deducting COGS and operating expenses. ROS is commonly used as a measure of how efficiently the company turns revenue into profit. The formula for return on sales is:
Return on sales = (Earnings before interest and taxes / Net sales) x 100%
Net Profit Margin: This is a comprehensive measure of how much profit a company makes after accounting for all expenses. It’s calculated as net income divided by revenue. Net income is often regarded as the ultimate metric of profitability — the “bottom line” — because it’s the profit remaining after deducting all operating and non-operating costs, including taxes. Net profit margin is usually expressed as a percentage. The formula for net profit margin is:
Net profit margin = (Net income / Revenue) x 100%
Operating Cash Flow Ratio (OCF): This liquidity KPI ratio measures a company’s ability to pay for short-term liabilities with cash generated from its core operations. It’s calculated by dividing operating cash flow by current liabilities. OCF is the cash generated by a company’s operating activities, while current liabilities include accounts payable and other debts that are due within a year. OCF uses information from a company’s statement of cash flows, rather than the income statement or balance sheet, which removes the impact of non-cash operating expenses. The formula for operating cash flow is:
Operating cash flow ratio = Operating cash flow / Current liabilities
Current Ratio: This shows a company’s short-term liquidity. It’s the ratio of the company’s current assets to its current liabilities. Current assets are those that can be converted into cash within a year, including cash, accounts receivable and inventory. Current liabilities include all liabilities due within a year, including accounts payable. Generally, a current ratio below one may be a warning sign that the company doesn’t have enough convertible assets to meet its short-term liabilities. The current ratio formula is:
Current ratio = Current assets / Current liabilities
Working Capital: This liquidity measure is often used in conjunction with other liquidity metrics, such as the current ratio. Like the current ratio, it compares the company’s current assets with its current liabilities. However, it expresses the result in dollars instead of as a ratio. Low working capital may indicate that the company will have difficulty meeting its financial obligations. Conversely, a very high amount may be a sign that it’s not using its assets optimally. The formula for working capital is:
Working capital = Current assets – Current liabilities
Quick Ratio/Acid Test: The quick ratio is a liquidity risk KPI that measures the ability of a company to meet its short-term obligations by converting quick assets into cash. Quick assets are those current assets that can be converted into cash without discounting or writing down the value. In other words, quick assets are current assets – inventory. The quick ratio is also known as the acid test ratio because it’s used to measure the financial strength of a business. It reflects the organization’s ability to generate cash quickly to cover its debts if it experiences cash flow problems. Companies often aim for a quick ratio that’s greater than one. The quick ratio formula is:
Quick ratio = Quick assets / Current liabilities
Gross Burn Rate: Generally used as a KPI by loss-generating startups, burn rate measures the rate at which the company uses up its available cash to cover operating expenses. The higher the burn rate, the faster the company will run out of cash unless it can attract more funding or receives additional financing. Investors often examine a company’s gross burn rate when considering whether to provide funding. The gross burn rate formula is:
Gross burn rate = Company cash / Monthly operating expenses
Current Accounts Receivable (AR) Ratio: This metric reflects the extent to which the company’s customers pay invoices on time. It’s calculated as the total value of sales that are unpaid but still within the company’s billing terms in relation to the total balance of all AR. A higher ratio is generally better because it reflects fewer past-due invoices. A low ratio shows the company is having difficulty collecting money from customers and can be an indicator of potential future cash flow problems. The current AR formula is:
Current accounts receivable =
(Total accounts receivable – Past due accounts receivable) / Total accounts receivable
Current Accounts Payable (AP) Ratio: This is a measure of whether the company pays its bills on time. It’s the total value of supplier payments that are not yet due divided by the total balance of all AP. A higher ratio indicates that the company is paying more of its bills on time. Spreading out payments to suppliers may ease a company’s cash flow problems, but it can also mean that suppliers are less likely to extend favorable credit terms in the future. The formula for current AP is:
Current accounts payable =
(Total accounts payable – Past due accounts receivable) / Total accounts receivable
Accounts Payable (AP) Turnover: This is a liquidity measure that shows how fast a company pays its suppliers. It looks at how many times a company pays off its average AP balance in a period, typically a year. It’s a key indicator of how a company manages its cash flow. A higher ratio indicates that a company pays its bills faster. The formula for AP turnover is:
Accounts payable turnover =
Net Credit Purchases / Average accounts payable balance for period
Average Invoice Processing Cost: Average invoice processing cost is an efficiency metric that estimates the average cost of paying each bill owed to suppliers. Processing costs often include labor, bank charges, systems, overhead and mailing costs. Factors such as outsourcing and the level of AP automation can influence the overall processing cost. A lower cost indicates a more efficient AP process. The formula for AP process cost is:
Average invoice processing cost =
Total accounts payable processing costs / Number of invoices processed for period
Days Payable Outstanding (DPO): This is another way to calculate the speed at which a company pays for purchases obtained on vendor credit terms. This KPI converts AP turnover into a number of days. A lower value means the company is paying faster. The formula for calculating days payable outstanding is:
Days payable outstanding = (Accounts payable x 365 days) / COGS
Accounts Receivable (AR) Turnover: This measures how effectively the company collects money from customers on time. It reflects the number of times the average AR balance is converted to cash during a period, typically a year. It’s a ratio calculated by dividing net sales by the average AR balance during the period. A higher AR turnover is generally desirable. The formula for AR turnover is:
Accounts receivable turnover =
Sales on account / Average accounts receivable balance for period
Days Sales Outstanding (DSO): This is another metric that companies use to measure how quickly its customers pay their bills. It is the average number of days required to collect accounts receivable payments. DSO converts the accounts receivable turnover metric into an average time in days. A lower value means your customers are paying faster. The formula for days sales outstanding is:
Days sales outstanding = 365 days / Accounts receivable turnover
Inventory Turnover: This operational efficiency metric shows the number of times the average balance of inventory was sold during a period, typically a year. In general, a low inventory turnover ratio can indicate that the company is buying too much inventory or that sales are weak; a higher ratio indicates less inventory or stronger sales. An extremely high ratio could indicate that the company doesn’t have enough inventory to meet demand, limiting sales. The formula for inventory turnover is:
Inventory turnover = COGS / Average inventory balance for period
Days Inventory Outstanding (DIO): This inventory management KPI provides another way to determine how quickly the company sells its inventory. It measures the average number of days required to sell an item in inventory. DIO converts the inventory turnover metric into a number of days. The formula for DIO is:
Days inventory outstanding = 365 days / Inventory turnover
Cash Conversion Cycle: This calculates how long it takes a company to convert a dollar invested in inventory into cash received from customers. It takes into account both the time it takes to sell inventory and the time it takes to collect payment from customers. It’s expressed as a number of days. The formula for operating cycle is:
Operating cycle = Days inventory outstanding + Days sales outstanding
Budget Variance: This compares the company’s actual performance to budgets or forecasts. Budget variance can analyze any financial metric, such as revenue, profitability or expenses. The variance can be stated in dollars or, more often, as a percentage of the budgeted amount. Budget variances can be favorable or unfavorable, with unfavorable budget variances typically shown in parentheses. A positive budget variance value is considered favorable for revenue and income accounts, but it can be unfavorable for expenses. The formula for calculating budget variance is:
Budget variance = (Actual result – Budgeted amount) / Budgeted amount x 100
Payroll Headcount Ratio: This KPI is a measure of the productivity and efficiency of the HR team. It shows how many full-time employees are supported by each payroll or HR specialist. The calculation is usually based on full-time equivalent (FTE) headcounts. The formula for payroll headcount ratio is:
Payroll headcount ratio = HR headcount / Total company headcount
Sales Growth Rate: One of the most critical revenue KPIs for many companies, sales growth shows the change in net sales from one period to another, expressed as a percentage. Companies often compare sales to the corresponding period during the previous year, or quarter-to-quarter changes in sales during the current year. A positive value indicates sales growth; negative values mean sales are contracting. The formula for sales growth rate is:
Sales growth rate = (Current net sales – Prior period net sales) / Prior period net sales x 100
Fixed Asset Turnover Ratio: This shows a company’s ability to generate sales from its investment in fixed assets. This KPI is especially relevant to companies that make significant investments in property, plant and equipment (PPE) in order to increase output and sales. A higher ratio indicates that the company is using those fixed assets more effectively. The average fixed asset balance is calculated by dividing total sales by net of accumulated depreciation. The formula for fixed asset turnover is:
Fixed asset turnover = Total sales / Average fixed assets
Return on Assets (ROA): This efficiency metric shows how well an operations management team uses its assets to generate profit. It takes into account all assets, including current assets such as accounts receivable and inventory, as well as fixed assets, such as equipment and real estate. ROA excludes interest expense, as financing decisions are typically not within operating managers’ control. The formula for return on assets is:
Return on assets = Net income / Total assets for period
Selling, General and Administrative (SG&A) Ratio: This efficiency metric indicates what percentage of sales revenue is used to cover SG&A expenses. These expenses can include a broad range of operational costs, including rent, advertising and marketing, office supplies and salaries of administrative staff. Generally, the lower the SG&A ratio, the better. The formula for SG&A ratio is:
SGA = (Selling + General + Administrative expense) / Net sales revenue
Interest Coverage: A long-term solvency KPI, interest coverage quantifies a company’s ability to meet contractual interest payments on debt such as loans or bonds. It measures the ratio of operating profit to interest expense; a higher ratio suggests that the company will be able to service debt more easily. The formula for interest coverage is:
Interest coverage = EBIT / Interest expense
Earnings Per Share (EPS): This profitability metric estimates how much net income a public company generates per share of its stock. It’s typically measured by the quarter and by the year. Analysts, investors and potential acquirers often use EPS as a key measure of a company’s profitability and also as a way to calculate its total value. EPS can be calculated several ways, but here’s a widely used basic formula:
Earnings per share = Net income / Weighted average number of shares outstanding
Weighted average is basically the average number of shares outstanding — or available — during a given reporting period. The total number of shares can change due to stock splits, stock repurchase, etc. If EPS were based on the total share outstanding at the end of the reporting period, companies could manipulate results by repurchasing stock at the end of a quarter.
Debt-to-Equity Ratio: This ratio looks at a company’s borrowing and the level of leverage. It compares the company’s debt with the total value of shareholder’s equity. The calculation includes both short-term and long-term debt. A high ratio indicates that the company is highly leveraged. This may not be a problem if the company can use the money it borrowed to generate a healthy profit and cash flow. The formula for debt-equity ratio is:
Debt-to-equity ratio = Total liabilities / Total shareholders’ equity
Budget Creation Cycle Time: This efficiency metric measures how long it takes to complete the organization’s annual or periodic budgeting process. It’s usually measured from the time of establishing budget objectives to creating an approved, ready-to-use budget. This metric is usually calculated as the total number of days.
Budget creation cycle time = Date budget finalized – Date budgeting activities started
Line Items in Budget: The number of line items in a budget or forecast is an indicator of the level of detail in the budget. A company can prepare its current budget by adjusting each line item in a previous budget to reflect current expectations. Budgets are often prepared at the account level or by project. They may include line items that correspond to lines in the company’s financial statements.
Number of Budget Iterations: This is a measure of the accuracy and efficiency of the company’s budgeting process. It is the number of times a budget is reworked during the budget creation cycle. A highly manual process can be more error-prone, leading to a greater number of iterations before the company arrives at an accurate budget. Other reasons for an increased number of iterations include extensive internal negotiations, changes in business strategy or changes in the macro-economic climate. A high number of budget iterations can lead to delays and an increased budget cycle time, which can hinder the company’s ability to start executing toward the goals defined in the budget.
Number of budget iterations = Total amount of budget versions created
Measuring and Monitoring KPIs With Financial Management Software
Beyond the common financial metrics and KPIs listed above, businesses may want to track specialized KPIs that focus on their inner workings or functions, such as those related to analyzing inventory, sales, receivables, payables and human resources. Manually mapping and calculating financial KPI formulas from general ledger accounts can be a cumbersome, error-prone and time-consuming process. That’s why many businesses use software to automate these calculations and create dashboards with all these key numbers in one place.
NetSuite’s robust accounting and financial management software includes built-in real-time dashboards and KPIs tailored to different roles and functions within the organization as well as by industry. Users can easily add customized KPIs to support specific requirements or goals. All information is automatically updated as the platform processes transactions and other financial data.
Financial KPIs and metrics help business leaders, managers and staff quickly get the pulse of how their company is performing and track any important changes over time. They also help leaders develop key objectives and keep their employees focused on measurable goals. Financial software that provides automated, accurate, real-time KPIs keeps the company moving toward those goals, rather than getting lost in mounds of data and reports.
Financial KPI FAQs
Financial KPIs are metrics tied directly to financial values that a company uses to monitor and analyze key aspects of its business. Many KPIs are ratios that measure meaningful relationships in the company’s financial data, such as the ratio of profit to revenue. KPIs can be used as indicators of a company’s financial health at any point in time. They are also widely used to track trends and analyze progress toward strategic goals.
Companies use many different financial KPIs. The KPIs a company chooses depends on its goals, industry, business model and other factors. Common KPIs include profitability measures, such as gross and net profit, and liquidity measures, such as current and quick ratios.
The five primary types of performance indicators are profitability, leverage, valuation, liquidity and efficiency KPIs. Examples of profitability KPIs include gross and net margin and earnings per share (EPS). Efficiency KPIs include the payroll headcount ratio. Examples of liquidity KPIs are current and quick ratios. Leverage KPIs include the debt-to-equity ratio.
Each company may choose different KPIs, depending on its goals and operational processes. Some KPIs are used by a wide variety of companies in different industries, like operating and net profit margin, sales growth and accounts receivable turnover. Companies may also choose KPIs that are specific to their industry. For example, manufacturers may track KPIs that measure how quickly and efficiently they convert their investment in fixed assets and inventory into cash, such as fixed asset turnover and inventory turnover.