Business metrics are important measures of company processes, and unlike gut-feeling (which needless to say is also an important managerial tool) can be both quantifiable and meaningful. These numerical representations are critical components of a managers’ role in monitoring company practices.
Some examples of useful metrics include a CFO checking the status of revenues across quarters, or a marketing manager examining customer Net Promoter’s Scores over a product’s lifespan (which asks the question: on a scale of 0-10, how likely are you to recommend our product to a friend?).
But there are so many metrics to choose from, and the work day only has so many hours!
The good news is – like most things in life – certain metrics are more useful than others and have the potential to signal the greater health of a business. These metrics are commonly referred to as key performance indicators (KPIs), and can deal with anything from SEO, sales, retail, the supply chain, to the faraway shores of finance. Check out a more complete list if you’re curious here.
In the meantime, let’s take a look at a handful of (arguably) the most critical KPIs for any business, whether it be a fledgeling enterprise or an established corporate giant. These very useful metrics reside in the financial category; KPIs that deal directly with our good friends profit, cash, assets… You know, tangible value!
Return on Equity (ROE)
(Net Income / Shareholder’s Equity) ROE highlights whether or not shareholder investments are being converted into increasing returns. This metric is a great indicator of efficiency and lets a company know if it is using it’s financial resources wisely.
Net Profit Margin
(Net Profit before taxes / Sales) * 100 The Net Profit Margin measures the percentage of profit gained for each unit of revenue that is earned by the company, and is a great measure of profit generation.
((Current Assets – Inventories) / Current Liabilities) The Quick Ratio lets you know if your assets can become liquid quickly enough to meet short term liabilities. Aim for a ratio between 1.5 and 3 for maximal flexibility in paying off your accounts payable.
Debt to Equity Ratio
(Total Debt / Total Equity) D/E ratio showcases by what means a company is funding its growth. As you can clearly see from the equation, a high D/E ratio signals that the company has been stressing debt financing over equity, which in general could point to a lower level of risk aversion.
(Not a Standard Ratio) Although in reality valuation as a KPI is not reduced to a simple and one size fits all equation, it can be calculated using an array of combined methods like DCF, balanced scorecards, check lists, and VC methods. Essentially, an integrated algorithm is out there. Why should you care? Well, company valuation is a clear signal of overall (quantitative and qualitative) company performance, and until recently was a value indicator that couldn’t be calculated with an automated system. Now it can be! Quickly and accurately so, in fact.
Explore more about company value management and consider integrating all of these KPIs into your managerial practices. That way you can better monitor and ultimately improve performance.
This article has been edited and condensed.
Emma Koeze works in marketing and strategy at Equidam, a financial accounting company based in Rotterdam, The Netherlands. She is currently studying International Business Administration at the Rotterdam School of Management and enjoys writing, reading and learning about the practical uses of finance in business. Connect with @equidamtweets.