The 10 financial KPIs to measure and analyse in 2024

Financial KPIs are metrics that express the financial performance of a company in a concise and straightforward way. Therefore, if you own or manage a business, it is essential to understand these parameters.

In this article we will discover the 10 financial KPIs to track and evaluate the performance of a business in 2024.

What are KPIs?

KPIs (Key Performance Indicators) are important metrics that businesses of any size use to evaluate their performance and determine whether their strategies are effective in achieving their desired goals.

In short, they are metrics that are used to determine if and how a company is progressing in achieving its objectives, whether these are strategic, operational, managerial or, precisely, financial.

KPI characteristics are generally summarized in the acronym SMART:

• Specific: each business goal must be defined in a specific way.
• Measurable: each KPI is accompanied by precise values and numbers.
• Achievable: each KPI is linked to achievable objectives.
• Relevant: the KPIs are aligned with the medium and long-term final objectives of the business.
• Timely: the KPIs are distributed evenly over time.

These characteristics are valid for all KPIs, from logistics KPIs to financial KPIs.

What are financial KPIs?

Financial KPIs are measurable values used to monitor a company's performance while achieving certain financial results.

They therefore concern every financial aspect of a business, from expenses to sales, from profits to cash flow, but they are also fundamental to keep other aspects under control, such as those related to the management of securities or bank accounts.

Let's discover which financial KPIs should be measured in 2024.

10 financial KPIs

The 10 financial KPIs used to measure the economic performance of your company are:

• EBITDA - Earnings before interest, taxes, depreciation, and amortization
• ROI - Return On Investment
• ROE - Return On Equity
• WCR - Working Capital Requirement
• Break even point
• Profit margin
• DSCR - Debt Service Coverage Ratio
• NOPAT - Net Operating Profit After Taxes
• Cash Flow 
• NFP - Net Financial Position

Let's analyse them in detail.

EBITDA - Earnings before interest, taxes, depreciation, and amortization

EBITDA is one of the most important financial KPIs for a business and one of the main indicators of its profitability.

It highlights the income of a business based only on its operational management, therefore without considering interest, taxes, depreciation of assets and amortization.

This financial KPI is essential to compare the performance of your business with that of other companies operating in the same sector.

EBITDA can be calculated in two ways:

EBITDA = Net Income + Taxes + Interest Expense + Depreciation & Amortization

and

EBITDA = Operating Income + Depreciation & Amortization

ROI - Return On Investment

ROI, or return on investment, is a financial KPI that measures the profitability of an investment, compared to its cost. It therefore refers to the amount of money that a business produces after receiving an investment.

Thanks to this financial KPI, it is possible to calculate how much you can earn from a business after investing a certain amount of money.

There are three different types of ROI:

ROI greater than 0: when the ROI is positive, the business is generating profit.

ROI equal to 0: when the ROI is equal to zero, the business is neither generating nor losing capital.

ROI less than 0: when ROI is negative, the investment is resulting in a loss.

The formula for calculating ROI is the following:

ROI = [(turnover - investment) / invested capital] x 100

ROE - Return On Equity

ROE, or return on equity, is the financial KPI used to measure the economic performance of a business based on the equity, or company shares, of the shareholders.

It is therefore a financial KPI that helps businesses and entrepreneurs evaluate the performance related to management and decision-making processes, also measuring the effectiveness with which resources are used to obtain a profit.

In short, the ROE allows you to evaluate whether your business can grow, using investments effectively and profitably.

The formula to calculate ROE is the following:

ROE = (Net Income / Equity) x 100

WCR - Working Capital Requirement

WCR is one of the financial KPIs that measures the economic resources of a company.

By resources we mean the financial resources that a business needs to cover the delay between outgoing and incoming transactions, guaranteeing a smooth production cycle even in case of refunds, debts, or future expenses.

In short, this financial KPI allows businesses to immediately assess their cash position, and to predict their ability to handle unexpected events, such as defaults or late payments.

The formula to calculate WCR is the following:

WCR = Warehouse + Customers Account (receivables) - Suppliers Account (payables)

Break-even point

The break-even point is one of the most important financial KPIs on this list, because it allows you to measure the amount to surpass to generate profit.

This financial KPI therefore plays a very important role in analysing the performance of your business.

The formula to calculate the break-even point is the following:

Break-even point = fixed costs / gross profit margin

Fixed costs are those expenses that do not vary with changes in production.

Knowing your gross profit margin is important to calculate your break-even point, namely where total revenue equals total costs.

Profit margin

Profit margin is a financial KPI that indicates, in percentage, the profitability of a business, product or service, excluding fixed and variable costs. A higher percentage of this KPI corresponds to a more profitable business.

The profit margin can be of two types, depending on the company needs:

Gross profit margin: generally used for the business as a whole, it measures the difference between revenue from product sales and the cost of products sold and is calculated by dividing gross profit by gross revenue and multiplying the result by 100.

Net profit margin: generally used for products and services, it is the percentage of profit obtained after all expenses have been deducted, including any taxes and interest, and is calculated by dividing the net profit by the total revenue, and multiplying the result by 100.

DSCR - Debt Service Coverage Ratio

DSCR is a financial KPI that measures the ability of a business to cover its debt, based on its cash flow, thus allowing you to identify a possible corporate crisis beforehand.

This is one of those financial KPIs that is particularly relevant not only for companies but also for banks, because it allows them to understand debt sustainability.

It is a metric that does not limit itself to quantifying the amount of debt in relation to assets, but also analyses the business' ability to repay that debt in a "dynamic" and prospective way, taking into consideration future development plans.

DSCR therefore represents the amount necessary to pay the interest and instalments of loans to companies.

The formula to calculate DSCR is the following:

DSCR = Net Operating Income / Total Debt service

Total debt service is the debt obligations in a given period of time.

NOPAT - Net Operating Profit After Tax

NOPAT, or Net Operating Profit After Tax, is a financial KPI that measures the profit generated by a business from its core operations.

NOPAT is used in the calculation of economic value added and cash flows, and is useful for lenders, shareholders, and debt holders because it is an accurate index of the profitability of a business. It is also perfect for comparing historical data of the company and the field in which it operates.

The formula to calculate NOPAT is the following:

NOPAT = Income from operations x (1 - Tax Rate)

Cash Flow 

Cash flow is a financial KPI that refers to the flow of money into and out of a company.

These include sales, operations, investments, financing, and any other activities involving the circulation of money within the business.

It is therefore one of the most important financial KPIs to determine a company’s stability.

A positive cash flow indicates that the company has financial resources and is therefore able to sustain different types of expenses. On the contrary, a negative cash flow indicates that the company is using more resources than those it is able to generate. This means that having important expenses, such as paying suppliers, could become problematic.

The formula to calculate cash flow is the following:

Cash flow = cash inflow - cash outflow

NFP - Net Financial Position

Net Financial Position is one of the main financial KPIs that evaluates the solvency of a business.

The calculation of NFP measures the overall level of debt of a business, both in the short and medium/long term, by expressing the difference between a company’s financial liabilities and financial assets.

The formula to calculate NFP is the following:

NFP = total company financial debts - assets that can potentially be liquidated and used for refund

Potentially liquid assets include cash, current accounts, negotiable securities, and financial receivables.

In this way, it is possible to calculate the amount of debt for which there is no immediate coverage, which is a fundamental to evaluate the performance and resources of a business.

Financial KPIs: conclusion

KPIs, whether financial or related to other areas of a company, do not have the same value or relevance for every type of business.

In fact, each activity is unique and requires specific indicators tailored to its business model and internal organization. It goes without saying that a global dropshipping company will need to evaluate different financial KPIs compared to a brick-and-mortar beauty store, and so on.

With this in mind, there is no precise number of financial (or other) KPIs that a company must monitor to evaluate its performance.

As with other situations, you only really know your business needs. Consequently, it is up to you decide which of the different KPIs you have discovered in this article is more or less useful for your business.

Financial KPIs: FAQs

Here you will find the answers to the most frequently asked questions by those who are new to financial KPIs.

What are financial KPIs?

The 10 most important financial KPIs used to measure the economic performance of your business are:

• EBITDA - Earnings before interest, taxes, depreciation, and amortization
• ROI - Return On Investment
• ROE - Return On Equity
• WCR - Working Capital Requirement
• Break-even point
• Profit margin
• DSCR - Debt Service Coverage Ratio
• NOPAT - Net Operating Profit After Taxes
• Cash Flow
• NFP - Net Financial Position

What are the main KPIs?

The main types of KPIs (Key Performance Indicators) concern Retail, the supply chain of raw materials, production, management, sales, logistics, finance, marketing, ecommerce and social media.

How do you identify the right KPIs?

A good KPI respects the characteristics summarized in the English acronym SMART. It is therefore a specific, measurable, achievable, relevant, and timely indicator. To identify a KPI, decide which aspect of your business you want to measure, identify the elements that influence it, observe the company's performance in that area and – when possible - make timely decisions to optimize performance.