14 Financial metrics and KPIs to help measure your business's strength

When running a small business, you can’t rely on your gut instinct all the time. Key performance indicators (KPIs) also have a part to play, especially when it comes to financial reporting. It’s best to be objective rather than subjective when determining the financial health of your company so you can make informed and data-backed decisions.

One way to objectively track the health of your business is through KPIs. KPIs are metrics that can help you chart progress toward a variety of business goals. Below we’ll explore 14 financial KPIs, their use cases, formulas, and other tips to help you make informed financial decisions.

What are financial KPIs?

Financial KPIs measure business performance against specific financial goals such as revenue or profit. They show the financial health of a business against internal benchmarks, competitors, and even other industries. Financial KPIs are widely used in strategic planning and reporting to help people decide where to focus their investment.

Keeping close tabs on your small business’s financial performance is essential to long-term success. Below, you’ll find eight important financial KPIs that will help you measure your business’s financial health and boost your growth rate.

• 1. Gross profit margin
• 2. Net profit
• 3. Net profit margin
• 4. Accounts receivable turnover ratio
• 5. Current ratio or working capital ratio
• 6. Quick ratio or acid test
• 7. Customer acquisition ratio
• 8. Return on equity
• 9. Cash conversion cycle
• 10. Return on assets ratio
• 11. Debt to equity ratio
• 12. Selling, general, and administrative ratio
• 13. Operating cash flow ratio
• 14. Budget creation cycle

1. Gross profit margin

• Indicates: Overall profit 
• Format: Percentage
• Formula: (revenue – the cost of goods sold) ÷ revenue = gross profit margin

Your gross profit margin shows how much of your revenue is profit after factoring in operating expenses like the total cost of production. Your gross profit margin should be large enough to cover your fixed (operating) expenses and leave you with a profit at the end of the day. You can then use the extra earnings for things like: 

• Marketing campaigns
• Dividend payouts
• Non-fixed costs

2. Net profit

• Indicates: Overall profit minus the expenses
• Format: Number
• Formula: total revenue – total expenses = net profit

Your net profit is your bottom line—the amount of cash left over after you’ve paid all the bills. Also known as net income, net profit accounts for both direct and indirect expenses and is an important component of operating cash flow.

3. Net profit margin

• Indicates: The percentage of revenue as profit
• Format: Percentage 
• Formula: (total revenue – total expenses) ÷ total revenue = net profit margin

Net profit margin tells you what percentage of your revenue was profit. However, unlike the gross profit margin, it accounts for all expenses, not just direct costs. This metric helps you project future profits and set goals and benchmarks for profitability.

4. Accounts receivable turnover ratio

• Indicates: The percentage of cash received from credit sales
• Format: Percentage 
• Formula: net credit sales ÷ average accounts receivable = accounts receivable turnover ratio

Your accounts receivable turnover ratio measures how well you collect cash from credit sales. A higher ratio for accounts receivable turnover is better than a lower ratio because it shows your customers are paying you faster. This in turn accelerates your cash conversion cycle—in other words, more cash comes in quickly. 

5. Current ratio or working capital ratio

• Indicates: The percentage of cash that is liquid
• Format: Percentage 
• Formula: current assets ÷ current liabilities = current ratio

The current ratio provides you with a measure of liquidity. You can use this KPI to determine if you have the necessary cash on hand to fund a large purchase. Creditors may also use this formula to determine the likelihood of you repaying a loan. 

6. Quick ratio or acid test ratio

• Indicates: The percentage of short-term debt that can be paid
• Format: Percentage 
• Formula: (current assets – inventories) ÷ current liabilities = quick ratio

The quick ratio or acid test ratio is another KPI that’s extremely relevant to a business’s financial health. The quick ratio shows a company’s ability to pay short-term financial liabilities immediately. The quick ratio is a better indicator of the ability to do so than the current ratio, as the current ratio measures a business’s likelihood of making payments within a year.

7. Customer acquisition ratio

• Indicates: The percentage of potential revenue from a customer
• Format: Percentage 
• Formula: net expected lifetime profit from customer ÷ cost to acquire customer = customer acquisition ratio

The customer acquisition ratio compares how much revenue you receive per new customer. If your customer acquisition ratio is:

• Less than one: Indicates that you’re spending too much to acquire customers and losing money as a result 
• One exactly: Indicates the customer lifetime value equals the cost to acquire them
• More than one: Indicates that your investment is worthwhile 

The higher the number, the better. For instance, imagine the equation yields a customer acquisition ratio of three. This means you’re earning $3 for every $1 you spend to acquire a new customer.

8. Return on equity

• Indicates: The return on shareholder’s investment
• Format: Number
• Formula: net income ÷ shareholder equity = return on equity

This KPI shows how successful you are at generating profit from shareholders’ investments in your business because a unit of shareholder equity represents total assets minus total liabilities. In other words, it reveals how much you make from each dollar invested in your business.

9. Cash conversion cycle

• Indicates: The amount of time needed to convert cash into inventory
• Format: Number
• Formula: days inventory outstanding + days sales outstanding – days payable outstanding

The cash conversion cycle (CCC) allows your company to assess its efficiency in terms of converting its working capital to inventory, selling said inventory, and collecting cash from these sales. The lower the CCC, the more effective your company is at selling products and converting those sales to working capital. 

10. Return on assets ratio

• Indicates: The percentage of income received from an asset
• Format: Percentage
• Formula: net income ÷ average total assets = return on assets ratio

The return on assets (ROA) is a testament to your company’s ability to turn liquid assets into income, not through sales but through utilization. Say your company works with machinery to produce a product. That machine's output is directly correlated to net income based on how efficiently it can produce the product. So you take your net income and divide it by the average number of machines your company has and you’ll get the ROA.

11. Debt to equity ratio

• Indicates: The percentage of debt in relation to the equity
• Format: Percentage
• Formula: total debt ÷ shareholder equity = debt to equity ratio

The debt to equity ratio proves its importance by showing how a company is acquiring debt in relation to its net assets. A debt to equity ratio that is too high may mean that the company has taken on too much debt to sustain or influence growth. This can be seen as a red flag to some, indicating that the company may not have enough assets to cover its debt if needed. 

12. Selling, general, and administrative ratio

• Indicates: The percentage of SG&A in relation to sales
• Format: Percentage
• Formula: total SG&A ÷ total sales = SG&A ratio

Looking for a place to cut costs? Try running a selling, general, and administrative (SG&A) ratio to start. Your sales, general, and administrative expenses are all charges that aren’t directly tied to creating your product. This could be, for example, those miscellaneous office expenses that pile up and take a cut from your bottom line. In general, the lower the SG&A ratio, the better. 

13. Operating cash flow ratio

• Indicates: The percentage of operating cash in relation to current liabilities
• Format: Percentage
• Formula: operating cash flow ÷ current liabilities = operating cash flow ratio

Very similar to the current ratio, the operating cash flow ratio also looks at liquidity. However, the operating cash flow ratio is more focused on short-term current liabilities and can help answer the question: “Do we have enough cash to cover our current short-term financial obligations?” You want this ratio to be high, as it shows you have more cash on hand to cover your current liabilities. 

14. Budget creation cycle

• Indicates: How quickly you’re able to put together your company budget
• Format: Number
• Formula: days for budget preparation + authorization + implementation = budget creation cycle

The budget creation cycle yields different results than the standard ratios and outcomes we’ve looked at in this article, but its importance cannot be underestimated. Being able to gauge how quickly you can get a company budget variance drawn up based on historical data speaks to both your understanding of your business model, business operations, sales growth, and return on equity, as well as the financial efficiency of your company. 

Choosing S.M.A.R.T.E.R. KPIs

Not all KPIs will be relevant to your business goals as a business owner and what you’re looking to achieve. Having the right accounting systems in place is a major step in the right direction, but you'll need to know how to set the right goals to push your success over the finish line. Using the acronym “S.M.A.R.T.E.R.” can help you better nail your goals down. Here’s the breakdown:

• Specific: Detail what you’re looking to achieve
• Measurable: Put a number to your goal
• Attainable: Take baby steps and try to catch the low-hanging fruit first 
• Relevant: Use KPIs that are relevant to your business
• Time Frame: Put a timeline on your goal
• Evaluate: Check-in on your progress
• Re-evaluate: Throw out what isn’t working and capitalize on what is

Choosing S.M.A.R.T.E.R. KPIs ensures that these key metrics are working well for you, increasing your chances of meeting your short-term and long-term goals.