{UAH} KEY PERFORMANCE INDICATORS

KEY PERFORMANCE INDICATORS

Among the key performance indicators in a business should be Financial Performance Indicators.The financial management process is only useful if the information obtained therefrom can be used for management decision making and guiding the strategic direction of the company.

To that end therefore, the various financial statements can be used evaluate the status or performance of the business and identify areas of improvement. Below are some key financial performance indicators.

1. Cash Conversion Cycle
The cash conversion cycle reflects the length of time it takes a company to sell inventory, collect receivables, and pay its bills. As a rule, the lower the number, the better. This is because, as the cash conversion cycle shortens, cash becomes free for a company to invest in new equipment or infrastructure or other activities to boost investment return. Also, the cash conversion cycle can be useful in comparing close competitors and assessing management efficiency

1.1. Days sales outstanding (DSO): The days sales outstanding analysis provides general information about the number of days on average that customers take to pay invoices. The smaller the number, the better.

1.2. Days in inventory (DII): is an efficiency ratio that measures the average number of days the company holds its inventory before selling it. The smaller the number, the better.

1.3. Days payable outstanding (DPO): is an efficiency ratio that measures the average number of days a company takes to pay its suppliers or pay its bills (accounts payable). The longer a company is able to hold its cash, the better its investment potential. In this case, a longer DPO is better

2. Liquidity Ratios
Liquidity ratios indicate whether a company has the ability to pay off short-term debt obligations (debts due to be paid within one year) as they fall due. Generally, a higher value is desired as this indicates greater capacity to meet debt obligations

2.1. Current Ratio: The Current ratio measures a company's ability to repay short-term liabilities such as accounts payable and current debt using short-term assets such as cash, inventory and receivables. Another way to look at it would be the value of a company's current assets that will be converted to cash over the next twelve months compared to the value of liabilities that will mature over the same period.

2.2. Quick Ratio: This is similar to current ratio, but is a more conservative alternative, in that the Current assets have been adjusted to remove inventory, as inventory may be viewed as not very readily convertible to cash.

2.3. Profit before Depreciation to Current Liabilities: This depicts a company's margin of safety to meet short term commitments using the cash flow generated from trading operations.

2.4. Operating Cash Flow to Current Liabilities: Operating cash flow to current liabilities pertains to the cash generated from the operations of a company (revenues less all operating expenses, plus depreciation), in relation to short-term debt obligations. Operating cash flow is a more accurate measure of a company's profitability than net income because it only deducts actual cash expenses and therefore demonstrates the strength of a company's operations.

2.5. Cash Balance to Total Liabilities: This ratio shows a company's cash balance in relation to its total liabilities. Cash is the most liquid asset a business has. A negative cash balance (caused by overdrafts) raises a warning signal and failure to address such an issue will likely result in liquidity problems.

3. Profitability Ratios
Profitability ratios measure a company's performance and provide an indication of its ability to generate profits. As profits are used to fund business development and pay dividends to shareholders, a company's profitability and how efficient it is at generating profits is an important consideration for shareholders

3.1. Gross Profit Margin: used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying overhead expenses and future savings. It is also viewed as a measure of production efficiency

3.2. Net Profit Margin: It measures how much out of every shilling of sales a company actually keeps in earnings. It indicates what percentage of company's sales revenue would remain after all costs have been taken into account

3.3. Return on Assets (ROA): This is a measure of management performance. An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings or income. Technically, a company should produce an ROA higher than then risk free rate of return to be rewarded for additional risks in involved in operating a business.

3.4. Return on Equity (ROE): The amount of net income returned as a percentage of shareholders equity. Return on equity measures a company's profitability by revealing how much profit a company generates with the money shareholders have invested.

4. Leverage Ratios
Leverage ratios, also referred to as gearing ratios, measure the extent to which a company utilises debt to finance growth. Leverage ratios can provide an indication of a company's long-term solvency. Whilst most financial experts will acknowledge that debt is a cheaper form of financing than equity, debt carries risks and investors need to be aware of the extent of this risk

4.1. Debt to Equity Ratio: Measures the extent to which a company utilizes debt to finance growth. This is an indication that the company is more reliant on equity to fund its assets and activities

4.2. Total Liabilities to Total Tangible Assets: Considers only those assets that can be easily valued and therefore easily liquidated to cover liabilities. This ratio reveals the level of risk. The higher the value of the TLTAI ratio, the higher the level of risk

4.3. Interest Cover Ratio: This is used to determine how easily a company can pay interest on outstanding debt

Which of the above ratios are you using in your business? Are they any other not listed above that you have found useful?

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