Tracking the right financial business metrics helps companies measure and analyze their financial state, empowering them to identify the efforts necessary to get on track – or hopefully stay on track with a more data-driven approach to financial management.
The following 10 financial KPIs are a solid starting point.
10 Important Financial Business Metrics
Tracking carefully chosen financial KPIs can help companies keep close tabs on their business performance, and identify potential issues before it’s too late.
These five financial business metrics are an excellent place to start for companies wanting to become more data-driven in their financial operations.
1. Sales Growth
To stay viable over the long term, company revenue should grow year over year. This is one of the most important financial business metrics for predicting future success. Monitoring sales growth can help identify areas of concern before they become irreparable. An off month isn’t the end of the world, but if revenue is on a downward or stagnant trend month after month, it could be time to look into why. Minimally, sales growth should be tracked monthly – but it’s also important to keep eye on how revenue is tracking against the company’s quarterly and annual goals.
How to calculate Sales Growth
If this formula results in a negative number, there could be trouble on the horizon!
2. Accounts Receivable Turnover
A high accounts receivable turnover indicates that most of your customers are paying their bills on time. A low turnover could indicate that your billing, payment, and accounting processes need some work. Acting on this KPI is more of an art than a science. If your company has enough working capital (see below), giving customers longer to pay could reduce churn and help with customer retention. The main thing to look for with this one of our five financial KPIs is whether the majority of customers are paying on time. If too many customers are taking too long to pay, you might eventually encounter cash flow issues.
3. Working Capital
All businesses need cash flow in order to operate. Working capital is the “cash on hand” that’s available to finance daily operations. Understanding the company’s working capital is imperative for future-planning decisions, like new hires and equipment purchases. It can also highlight gaps in funding that could pose challenges to moving the company forward.
While having a high amount of working capital shows that the company is doing well, having too much cash on hand could indicate that the company isn’t investing enough back into the business to help it grow. Negative working capital could be a clue that it’s time to aggressively pursue new customers, increase prices, or apply for a business loan.
How to calculate Working Capital
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4. Operating Expense Ratio
Companies are in business to turn a profit, and most will probably want to scale up in the future. The next of our financial business metrics, operating expense ratio, compares the company’s operating expenses to its total revenue. Keeping expenses down is a great way to increase profits, especially during economic downturns when increasing sales might be more difficult than when the economy is doing well. This KPI could be especially important if a company is looking to attract new investors, who will want to know how the company’s revenue measures up against its operating costs.
5. Customer Acquisition Cost
A steady flow of new customers is critical to long-term success, but acquiring them can be expensive. We’ll end our list with one of the most important financial metrics for marketing – customer acquisition cost. This important financial business metric can be helpful in tracking marketing ROI and identifying places in need of adjustment. If cold-calling isn’t working, maybe it’s time to focus on other channels – for example, CPC advertising, content marketing, or social media campaigns. Keeping a close eye on customer acquisition costs will help you identify the most effective channels for bringing in new customers, so you can invest your marketing budget where it counts.
Calculating CAC
6. Annual Recurring Revenue
Often shortened to ARR, Annual Recurring Revenue describes the subscription-based estimate of the revenue your company will have this year. ARR is an extrapolation of current (monthly) finances, representing a longer-term (annual) trend. As it’s a predictive metric, ARR is particularly important for startups. For this reason, it’s a metric that’s particularly important to stakeholders: while they likely won’t regard the daily ups and downs of your finances as particularly important, a solid ARR demonstrates your company is on a good track and has solid potential for growth.
However, remember that ARR is based on a single month’s recurring revenue. To obtain a more complete picture of your financial performance, you’ll need to evaluate your ARR alongside other metrics.
How to calculate ARR
7. Return on Ad Spend
ROAS (Return on Ad Spend) measures revenue for every dollar spent on advertising. Just how much bang should you get for your buck? A good ratio is often considered to be 4:1—for every dollar spent on advertising, you should get four back. But this is only a starting point: the higher your ROAS, the better your ads translate into revenue.
ROAS is a highly flexible metric. You can use it to measure revenue from across all advertising channels, or to measure revenue from specific channels or campaigns. Because it gauges the effectiveness of ad campaigns, your ROAS will help you determine whether to continue, intensify, or abandon a given campaign.
Calculating ROAS
8. Value of New Charges
This KPI is the total of all new charges your company has accrued over the last period—month, quarter, or year. Charges can include those of purchases, fees, or billing cycle interest. Value of New Charges is a relevant KPI because it gives a clear indication of your current financial position, allowing for an up-to-date understanding of your position so you don’t miss payments on any important fees!
A good way to keep track of this KPI is by using a line chart, which will help you see how the value of your current charges compares with those of past periods.
9. New Order Value + Average Order Value
Two for the price of one? Sounds great to us! This pair of closely-linked KPIs offer important insights into customer behavior. The New Order Value is how much the last customer on your website spent—a single purchase at a discrete point in time. Meanwhile, the Average Order Value is the mean amount customers spend on new orders in your website within a given period.
These KPIs aren’t only financial—they provide insight into customer behavior. Because customer behavior is influenced by the environment, New and Average Order Values also provide crucial feedback on your online infrastructure. For example, if you notice a recent downturn in Average Order Value that coincides with a website upgrade, it could be more than coincidence. Customers simply won’t order as much if your web presence isn’t user-friendly.
On another note, you can use tactics such as cross-selling, upselling, providing volume discounts, and offering free shipping (above a specified minimum) to nudge customers toward making more, and more valuable, purchases.
How to calculate Average Order Value
10. Value of New Payment Intents
Finally, the Value of New Payment Intents KPI calculates the most recent payment intents in a period from your Stripe account. Closely connected with POS (points of sale), payment intents track and manage a payment life cycle: creation, setting of payment method, processing, and payment success or failure. In short, every order or session in your payment system counts as a payment intent.
This KPI helps forecast how your month will look in regard to orders and payments, especially useful when budgeting. Seasonal variation can be expected when you evaluate this KPI, so serious dips in value can signal customer dissatisfaction, and rises in value could be the fruits of a successful marketing campaign. Not only does this KPI help monitor customers’ spending habits and their effects on your revenue flow, but it can also help you make data-driven decisions about the efficacy of your marketing and sales campaigns.
Use Automated Reporting to Track These Financial KPIs
Tracking and acting on these five financial business metrics will start you on the data-driven path to better financial management. From marketing to sales – and everything in between, Plecto enables you to schedule and generate automatic reports with custom KPIs and real-time data to help you stay on top of your company’s financial state.
Take your finance tracking to the next level. Sign up for a free 14-day trial today!
