BLOG

What are financial KPIs and how do they help manage your accounting effectively?

What are financial KPIs and how do they help manage your accounting effectively?: Tabla de contenidos

Financial KPIs

Financial KPIs are essential tools for any company looking to maintain precise control over its accounting. This article unravels how these indicators can transform accounting and financial management, offering unprecedented control and insight into the performance and economic health of your company in the competitive Spanish landscape.

What are financial KPIs?

Financial Key Performance Indicators (KPIs) are metrics used to measure the outcome of actions taken by a company on a financial level. In other words, they are data or sets of data that provide all quantitative information about achieving a specific objective.

Overall, these indicators are crucial for company management to make decisions based on the company’s reality. They are often presented in the form of charts or tables within a dashboard, allowing anyone to interpret them at a glance.

However, not only executives and partners are interested in knowing the organization’s status. Investors also frequently use financial KPIs to quickly understand a business’s evolution. This allows them to make decisions with relevant information about buying or selling shares.

Understanding and using financial KPIs is vital for making informed and strategic decisions. They enable identifying areas for improvement, detecting problems before they become crises, and optimizing the company’s resources.

11 main financial KPIs and their use

Gross margin:

The gross margin is a crucial indicator that reveals the profitability of an activity by subtracting production costs from sales revenue. Essentially, it shows how much money remains after covering the direct costs associated with the production of goods or services.

A healthy gross margin indicates that the company is generating enough income to cover its variable costs and still make a profit. It is an important benchmark for evaluating the efficiency and profitability of business operations.

Net profit margin:

Shows the percentage of revenue that becomes profit after deducting all expenses, including operating, financial costs, and taxes.

A high net profit margin indicates efficient cost management and good financial health. It is an essential metric for evaluating long-term profitability and a company’s ability to generate sustainable profits.

EBITDA:

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a financial indicator that shows a company’s ability to generate profits considering only its core productive activity, without taking into account the effects of financing structure, tax systems, and accounting methods.

It is a useful metric for evaluating a company’s operating profitability and its ability to generate cash from its core business operations. EBITDA is especially relevant for comparing financial performance between companies in different sectors or with different capital structures.

Working capital:

Reveals what capital is available for investment. It is calculated by subtracting debts from assets. This indicator is crucial for assessing the financial health and the ability of a company to finance its daily operations and short-term growth needs.

Quick liquidity ratio:

Shows the company’s ability to meet its short-term debts with its most easily convertible liquid assets into cash. It is calculated by dividing the sum of cash, marketable securities, and accounts receivable by current debts.

This ratio is important for evaluating the financial strength and the company’s ability to meet its short-term financial obligations.

Accounts payable volume:

Allows knowing how long it takes the company to pay its suppliers. This indicator is important for detecting potential liquidity problems and effectively managing cash flow.

If the volume of accounts payable significantly increases over time, it may indicate liquidity problems and difficulties in meeting financial obligations.

Return on Investment (ROI):

Allows knowing the profit obtained from an investment in relation to its cost. It is an important measure for evaluating the effectiveness and profitability of investments made by a company.

Return on Equity (ROE):

It is a financial indicator that shows the profitability generated on the company’s equity. It is a key indicator for investors, as it reflects the efficiency with which own resources are used to generate profits.

Return on Assets (ROA):

Measures the profitability that assets generate for the company. It is an important metric for evaluating operational efficiency and a company’s ability to generate profits from its assets.

Return on Capital Employed (ROCE):

Measures the relationship between operating income and capital employed. It is a key measure for evaluating capital efficiency and a company’s profitability.

Inventory turnover:

Measures how many times inventory is sold and replaced in a given period. A high index suggests good inventory management and healthy product demand.

Tracking KPIs to improve your financial planning

Every company has its own needs and goals. Identifying which KPIs are most relevant to your specific business is crucial for effective financial management. This identification process is based on a deep understanding of factors such as the industry in which the company operates, its size and structure, as well as its current financial situation.

Once you have identified the appropriate financial KPIs for your company and sector, you should follow the steps detailed below to implement an effective system for tracking and analysis.

Dashboard implementation
Implementing a dashboard for tracking KPIs is fundamental. This dashboard allows the most important metrics to be visualized clearly and organized. Using tools such as advanced spreadsheets, Microsoft BI, Google Data Studio, or integrated accounting software can facilitate this process.

Frequency of KPI analysis
Establishing the frequency of analysis is crucial. Deciding whether reports will be monthly, quarterly, or annually will depend on the specific needs of the company and its strategic objectives.

Data visualization and interpretation
Data visualization through charts and tables facilitates the understanding of information. Interpreting the results correctly allows for making decisions based on concrete data. Comparing KPIs with established goals, previous results, and competitive metrics is essential for a comprehensive evaluation.

Continuous optimization
Continuous optimization of KPIs involves regularly reviewing and adjusting these indicators to maintain their relevance and effectiveness. This involves evaluating their alignment with business objectives, making modifications as necessary, and considering changes in the business environment. This process ensures that the company is using the most relevant and effective metrics to measure its performance and achieve its business goals in an ever-evolving business environment.

Boost your company’s international growth with strategic financial KPIs

Financial KPIs are fundamental for controlling and continuously improving business accounting. By understanding and applying these indicators, your international company can optimize its operations and ensure sustainable growth.

If you need help implementing and managing your financial KPIs, our accounting service in Spain is here to assist you. Having accounting experts not only provides peace of mind but also allows you to focus on what you do best: growing your business. Contact us today and discover how we can help you!

validado por

gcoweb

Leave a Reply

Your email address will not be published. Required fields are marked *

continúa leyendo

Temas relacionados que pueden interesarte
International
Mastering financial statements: Essential guide for international companies in Spain
International
Tax incentives and financial benefits for subsidiaries in Spain
International
Spanish Tax System: Keys for business internationalisation