As a manufacturer, you are most likely already tracking fundamental key performance indicators (KPIs) like sales, expenses, and profits. In addition to these critical metrics, data in your financial statements contain an abundance of rich KPIs packed with insight into how to make the company run more effectively and efficiently.
Financial KPIs have the power to look beyond basic operational metrics and determine the overall viability, profitability, and value of the business. When consistently tracked and monitored, these financial KPIs help manufacturers improve operational efficiency, enhance profitability, and optimize resources to thrive in the market.
Why track financial KPIs
KPIs are quantifiable values that measure and benchmark essential metrics across the business. Using the right KPIs, savvy business owners gain a look into the policies, personnel, and processes that are working successfully or bring to light shortfalls stagnating or hindering the business from reaching its full potential.
Financial statements, whether obtained internally or provided by your CPA, contain a vast amount of information about the health and performance of the business. Generally, a trial balance, a formatted copy of your financial statements, or internal financial statements like balance sheets and cash flow statements you have on hand all contain readily available data without complex reporting.
Selecting the best financial KPIs
Unlike sales or production KPIs alone, financial KPIs point directly to the profitability and viability of the business. An impactful set of financial KPIs should create a bird’s eye view of everything from quality assurance, production, operations, and overall financial performance. While there are many potential metrics to track, some possibilities include operating cash flow, net profit margin, inventory turnover, working capital, current ratio, and return on equity.
How to use financial KPIs
Let’s take operating cash flows as an example. Tracking operating cash flow grants insight into the company’s ability to pay for routine expenses and helps measure cash generated and used. It also examines critical data points like net income, depreciation, amortization, and working capital. Together, this information looks beyond profit and offers a deeper look into the health of current capital investments, boosting your ability to make stronger strategic investments in the future.
Operating cash flow can be positive or negative, with a negative number not necessarily meaning something is wrong. Rather, it could point to the business having increased spending on a specific project or investment at a given moment. Tracking this KPI over time can help determine when that spending begins to negatively affect the business and alert you that it may be time to shift strategies.
Go beyond tracking
While tracking financial KPIs will inherently boost the quality of the data used to make essential business decisions, it’s never enough to simply track metrics for the sake of it. Effective KPIs should be used to set, track, and improve strategic goals across the organization. The most potent metrics will adhere to the same guidelines as “SMART goals,” meaning they should be specific, measurable, attainable, relevant, and time-bound. Once a metric is selected, it must be evaluated for effectiveness, reevaluated often, and adjusted if and when it no longer serves its purpose.
The bottom line
The information collected from KPIs offers invaluable insight into the company’s financial performance and can help shed light on areas of underperformance, inefficiency, and financial burden. Ultimately, this information should be used to make proactive shifts in policies, processes, personnel, and products to increase the company’s overall financial success and sustainability.
If you have questions about financial KPIs or want to learn more about how your organization can best implement a strategy to meet its financial goals, we’re here to help. Please contact us.
Erika Gagne joined ARB in 2013 as a college intern and became a manager in 2021. She specializes in providing business advisory and attest services primarily to commercial businesses, credit unions, auto dealerships, and nonprofit organizations.
