Six financial KPIs to analyse for your annual business review

Planning ahead is better executed when you look back before beginning. The annual review is a time to look in the rear-view mirror and take stock of the previous year. The ability to see an entire year’s performance helps you to analyse how you responded to events during the last 12 months and derive knowledge from the observation.

It is also an opportunity to go over your company’s development projects and look ahead. For this, it is important to be able to refer to reliable, accurate numbers… and to the right KPIs. Here are six key performance indicators that you can use to review your business, year in, year out.

The WCR shows the amount of financial resources needed by a company to ensure its production cycle and its repayments of both debts and upcoming operational expenses. A rise in WCR usually means you have fewer financial resources to pursue other objectives such as new product development, geographical expansion, acquisitions, modernisation or debt reduction. A drop indicates that fewer of your assets are tied to running the company’s daily operations, and you have more funds to do with as you please.

WCR calculation: Net working capital requirement = inventory + accounts receivable – accounts payable

While gross margin offers information about profitability (revenues less costs related to the company’s activity), gross operating surplus (GOS) measures how much cash is left after wages and taxes are paid.

GOS describes the company’s operating profitability over a complete operating cycle. The company’s financial equilibrium can be analysed by comparing GOS from one year to the next. GOS can also be used to measure before-tax earnings, by subtracting amortisation and depreciation.

Gross margin calculation: Gross margin = net sales – COGS (Cost of goods sold)

Gross operating surplus calculation: Gross operating surplus = net sales – (wages + taxes)

Use this indicator to assess the financial health of the business and measure the surplus resources generated at the end of the year, which may then be allocated to items such as loan repayment, new investments or an increase in working capital. The amount of cash generated internally can help you to decide, for example, whether to pay out dividends. Calculating self-financing capacity each year will enable you to assess the change over several financial years. Ideally, there should be an increase over time.

Self-financing capacity calculation: Self-financing capacity = net profit + depreciations, amortisations and provisions.

Inventories are the finished goods held by a company that are available for sales and also includes the raw materials used to produce these goods – if you produce them yourself.

While they remain unsold, inventories are classified as current assets on your balance sheet. When an inventory item is sold, its carrying cost (storage, etc) transfers to the cost of goods sold (COGS) category on the income statement.

As inventories are part of the money going into and out of your business, it’s a good idea to implement a constant running inventory system, with a complete measurement at least at every year-end.

Goods inventories are assessed by means of a physical stocktaking. Inventories of goods, raw materials and supplies are booked in the balance sheet at their acquisition cost, while work-in-progress is measured using production costs incurred through to the close of the accounting period.

COGS calculation: Cost of goods sold = purchases + beginning inventory – ending inventory

Small and mid-sized companies do not always keep track of late payments. Yet these are key indicators, as delayed payments can have a catastrophic impact on your cash position and, consequently, on your ability to continue operating Hence the importance of setting up a dashboard that will provide an overview of actual payments along with trade accounts receivable and payable.

To help track payments, turn to a key but poorly-known indicator: the Days Sales Outstanding (DSO).

It measures the average time of payment for your commercial invoices and can help you assess your ability to receive payments in a given period of time (for example, one month). This information will allow you to act before it is too late, by issuing reminders, renegotiating payment terms with suppliers or anticipating financing requirements.

DSO calculation: DSO = (accounts receivables / total sales) *number of days

Let’s take an example: over the month of January, ABC Ltd has sold for €50,000 worth of goods, with €35,000 in accounts receivable on its balance sheet at the end of the month. Its DSO is: (35,000 / 50,000) * 31 = 22.3 days. It means that on average in January it took ABC Ltd 22 days to collect payment after a sale had been made.

Thanks to these indicators, you will not only be able to make a precise assessment of your activity and financial performance over a 12 month period, you will also be able to make future projections. A complete annual review is the key to creating a forward-looking growth strategy.

For more tips and advice on business financial monitoring, download our ebook: Boost your financial performance analysis.