Key Performance Indicators of a Business

A company’s numbers can be analysed and help assess its performance from more than one dimension. When compared against a benchmark it can be seen if a company is doing well or not.

These performance metrics help measure:

• Financial Status and Net Worth
• Profitability
• Financial Leverage
• Productivity

The measure of Financial Condition and Net Worth include current ratio, quick ratio, day sales outstanding (dso) and Inventory turnover.

Current Ratio:

Current Ratio =(Current Assets) ÷ (Current Liabilities)

This ratio where current assets are divided by current liabilities, help assess the liquidity of the company. This helps assess it’s ability to generate cash for operations. Current assets are cash or cash like debtors who will pay in the next 12 months. Likewise current liabilities are debts that must be paid within the next 12 months. Current assets include accounts receivable and inventory. Eventually some of these will become bad debts and some of it dead stock. So current assets must be more than equal of the current liabilities. Banks like to see a ratio of 2:1 or more. Industry standards vary. This ratio reflects the company’s cash reservoir to clear its liabilities.

Quick Ratio

This ratio sees current assets after inventory is removed. This is more liquid current assets.

Quick Ratio = (Current Assets-Inventory)  ÷ (Current Liabilities).

In the case of firms with large inventories, banks and investors seek out the quick ratio. In a company with a 2:1 current ratio, a 1.4:1 quick ratio is adequate.

Day Sales Outstanding

The day sales outstanding are the number of days of average sales yet uncollected in accounts receivable.

Day Sales Outstanding = (Accounts Receivable) ÷ (Average Revenue per Day)

This number tells us how much the company adheres to it’s collection terms .A company with a 30 day credit period does not ideally get it in this time frame. A 40-50 day range is normal.

Inventory Turnover

A quicker turnaround of inventory indicates a lower chance of dead stock piling up. High turnover in inventory means how quickly inventory is leaving the plant and being replaced.

Inventory Turnover =(Annual Cost of Gods Sold)÷ (Average Inventory)