Financial KPIs, Scorecards, Metrics

When engaging in business, what are some important financial indicators to take note of? These indicators will give you valuable information on how to start, manage, and run your business.

Often, the first thing you think about when you engage in business is the returns in investment that you can expect after some time. These returns would take various forms, from interest income to plain old sales profits. However, running a venture is not just putting in or investing money then waiting for the returns to come. There are important financial indicators that every businessman must consider before engaging, or while engaged, in a certain activity.

Financial indicators give valuable information as to the financial or economic welfare of a certain entity. It shows whether or not such an entity is enjoying a profitable or advantageous venture. It also shows the condition of the entity and gives information as to matters that need decision-making in the topic of whether or not the activity should continue.

The first step in going through the process of considering what indicators there are that affect your business is to decide first what business outcomes you expect in running your venture. This is because of the fact that not every businessman has money in mind when running a business. Although most of them want money for their business – and who does not? – there are still those who do not give that much weight into the amount of money that comes in after every activity. These are businessmen engaged in charitable or religious ventures, where most or a part of their income goes to recipients as donations. This will determine how the various financial indicators will affect the decision-making capability of the businessman.

When you think of profits, one good financial indicator is the presence or absence of profit. The elementary definition of profit is that it is the excess amount that returns to the businessman on top of the money invested. In other words, when the businessman realizes an amount of money that is larger than the amount invested, the excess is considered profit. This is usually and commonly the main object why people engage in business in the first place.

Another financial indicator is expenditure. Normally, the higher the expenditures, the lower the success probability will be. Adversely, the lower the expenditures, the higher the success probability will be. Of course, this is not the case for all ventures. The amount of expenditures a business experiences and how it affects its overall success really depends on the type of venture. Sales activities usually have more expenditures than professional activities.

Solvency is another important indicator. This determines the ratio of a businessman’s assets versus his liabilities. Thus, if a businessman has more assets than liabilities, he may be said to be solvent, thus establishing a good practice. However, if the businessman has more liabilities than assets, then it may be said that he is insolvent, or that he does not have enough money or property to pay off his debts and other obligations. In this case, the venture will most likely fail. Although this is just one of the important financial indicators to consider, solvency may well be the most important indicator.

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The global economic crisis has emphasized finance related aspects, such as the important role of HR in finance, and the need for a harmonious relationship between these two departments.

The global financial and economic crisis has made managers and companies in general even more aware of the importance of sound financial strategies and decisions. With many corporations, including even the very largest ones, struggling to survive and avoid bankruptcy, the economic climate seems quite harsh. As such, many groups are forced to re-evaluate the myriad aspects of their performance, including, for example, the role of HR in finance.

HR or human resources is undeniably an integral part of any organization. After all, where would a company be without its motivated, well-performing, loyal employees? Most successful companies have realized this fact and have taken to investing more and more into maintaining and improving their so-called human capital. Returns on these investments may not be as direct or immediate as on other investments, but in many cases, they are quite significant. The results of good, effective training programs and incentive schemes should not be underestimated. They are usually only neglected because of their indirect nature that makes them harder to quantify.

Now, HR has two kinds of relationship with finance. One is the fact that the activities of the human resources department would also need to be allocated the proper amount of resources. This allocation and need would have to be factored into the considerations of budget and financial strategy.

For example, in these current economic times, it would actually be a good idea to invest more heavily in training and other employee improvement programs. This might seem to run counter to the intuitive idea of having to cut costs as much as possible, but in fact, to survive the crisis, any organization needs to go back to its people. By ensuring that employees are as well prepared as ever to handle changing circumstances, organizations would increase their chances of regaining their performance once the crisis has passed. Investing in employees makes even more sense during uncertain economic times because other kinds of investments have suddenly been thrown into doubt. Financial markets, such as the stock market or even the foreign exchange, will inevitably take some time before once again stabilizing.

On the other hand, human resources would also have its own role in shaping the kind of people and employees that are in the finance department of the company. Thus, they should take utmost care to select only the best and most worthy employees to take on the critical tasks of navigating the turbulent economic waters. To this end, they should be aware of the need to evaluate possible employees based on their experience and historical performance. They should know the contextual financial conditions underlying this performance to avoid any biases or distortions.

The role of HR in finance cannot be understated. For a company to be successful, there should be a harmonious, synergistic relationship between the two departments. Finance officers should be aware of the need to give human resources its due share of the budget, while HR should be able to populate the finance department with worthy candidates.

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How to manage finance efficiently with KPIs is actually not a complicated concept once you know what your indicators say. This requires basic knowledge of business key performance indicators.

Every activity has certain indicators that give information as to its performance and functionality. This is particularly true with ventures and certain activities that are centered on finance-related pursuits. How to manage finance efficiently with KPIs is something that every manager and businessman must know in order to ensure that the venture or activity goes smoothly and continues to flourish. For this purpose, here are some tips to help you do just that.

KPIs stand for key performance indicators. These are pieces of data that reveal the strong and weak points of a certain activity, or in this case, a financial venture or business. With the use of these indicators, you can easily find out which aspects of your activity or venture needs some adjustment or improvement, and which aspects are doing just fine. In order to do this, however, you must first know what key performance indicators to consider.

In a venture, it is relatively easy to know if the activity is doing well or not. The first key performance indicator in an activity is the profit that is realized, if any at all. It is a general rule that the higher the profit or return, the more effective and successful the activity is. On the other hand, if the business experiences low profits or returns, then it is not doing well at all. The presence or absence of profit will tell you what you need to do. It will tell you if there is a need for change or upgrading.

Another key indicator is customer satisfaction. If you are engaged in the provision of services and products to the consumers in general, then the satisfaction of the customers will be a valuable indicator in showing if the business is doing well or otherwise. This needs no further explanation since the fact that customers are satisfied means that a business is well accepted and recognized.

Customer satisfaction is not, however, a concrete indicator of success on its own, at the very least. Just because your customers are satisfied does not mean that your business is thriving. Why, you ask? This is because customer satisfaction can be attained at the expense of the welfare of the venture. If the businessman keeps giving customers what they want at a minimal price, which is usually the basis on how customers are satisfied, you might eventually experience insolvency, or worse, bankruptcy. The key performance indicator in this case is the ability of the businessman to balance customer wants with the needs of the entity. Thus, in order to continue giving customers what they want, the business must be able to support itself by demanding a reasonable and equitable price for the service or product it delivers.

How to manage finance efficiently with KPIs is the question most easily answered by those who have had experience with using key performance indicators. All that has to be remembered is that key performance indicators show practically everything about all the aspects of a venture. What the businessman has to do is to consider these indicators and use them accordingly in order to properly carry out the management function.

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