Financial Key Performance Indicators - Essay Sample

Date:  2021-03-26 21:35:44
7 pages  (1917 words)
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This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

A key performance indicator refers to a measurable value which indicates how a firm is achieving its primary business objectives (Marr, 2012). In most cases, organizations use KPIs to evaluate if they have achieved their targets. Some of the financial key performance indicators include gross profit margin, net profit margin, current ratio, aging accounts receivable, and net profit. The indicators are also used to show the financial performance of a company.

Profit is considered the most important financial performance indicator as it entails analyzing both the net and gross profit of the company to see how it is performing (Parmenter, 2007). Increased profit is an indication that the company is performing well financially. Cost is another important financial indicator to consider. The cost metric measures the cost effectiveness of the company. It also shows that the company should find the best ways of managing and reducing costs for it to make profits. The metric of cost goods sold enhances the company to get a rough idea of how the profit margin and product markup is supposed to be to ensure that the company is performing well (Marr, 2012). Furthermore, it is an important key that is used to knowing how the firm can outsell its competition. If the company can compete effectively with the competitors, then it is an indication that it is performing well. The day sales outstanding considers the accounts receivables of a company then divide them with the credit sales. The number is then multiplied by the total number of days in the timeframe of the firm. In case the number achieved after computation is low then it indicates that the company is performing well.

Target versus LOB revenue helps in comparing the projected revenue and the total revenue of the company. Minimizing the costs is not the only way that can be used to know if the company is performing well. The customer lifetime value should also be put into considerations when measuring the financial performance of a company as it shows if the company has a long-term relationship with the customers. According to the information provided, it is evident that 75% of the customers usually continue with the project after designing. Using this metric helps the company to get the best customers at reasonable prices. The customers retention and satisfaction are another important issues to consider when analyzing the performance of a company. According to this concept, the customers should be motivated for them to continue yearning for a firms services (Parmenter, 2007). Motivated customers usually put more efforts in ensuring that the products produced are of high quality and the customers are served well. Different performance indicators can be used to measure this metric including the number of consumers making purchases frequently.

The net promoter is another important performance indicator although it is used in measuring the long-term growth of the firm (Marr, 2012). Through this metric, the customers will get the chance of recommending the company to their friends, colleague, and relatives which will result to increase the sales and profits of the company. The number of customers a company is gaining or losing helps it to know if the needs of the consumers are met (Parmenter, 2007). When the company is gaining more customers, then this is an indication that it is performing well. However, when the customers are reducing then it means that the company is not performing well. Thus it should find ways of evaluating the needs of its consumers.

The current ratio describes the capability of the company to pay its bills. It is calculated by diving the current ratio with the current liabilities (Parmenter, 2007). Through this, the creditors of the company will easily know if their debts will be settled. Furthermore, aging accounts receivable involves sending bills to the consumers. In case some of the customers pay their bills in time while other pay their bill late, the company can find the reason for its cash flows problem. The company can resolve this issue by commencing to write off the debts or commence charging interest on the accounts that are overdue.

The following are the main financial indicators that determine the financial health of Royal Design Inc. the gross profit is the most important financial performance indicator used in determining the financial health of the company.

Gross profit= (revenue-the cost of goods sold)

$10506 9245 = $1261.

In comparing the gross profit for the financial year 2016 and 2015, the one for the financial year 2016 is low which indicates that the company is not performing well. In 2016, both the cost of sales and revenue have decreased. All the same, the gross profit of the business is large enough to cover its fixed operating expenses. Therefore, although the profitability of the company is decreasing it has the ability to cover its fixed operating expenses. The net profit is the amount the company is left with after paying all the bills. It is computed by subtracting the total expenses from the total revenue. In 2015 and 2016, the company made a net profit of $339 and $(67) respectively. The company made losses in 2016 which is an indication that it is not performing well financially. The loss made by the firm means that it does not have enough capital to keep its operations during the slow periods as it made a loss.

Net profit financial indicator helps in showing the company the percentage of revenue that was profit. It is computed by dividing the net profit by the total revenue. 67/10, 506 = 0.006377. The value of the profit margin is very low. Thus, it cannot assist the company to set goals and project the future profits. Most of the firms use the aging accounts receivable as an eye opener. It indicates the duration of time the consumers take to pay their debt. According to the information provided, it is evident that only 15% of your consumers proceed with their projects at a later date. Therefore, the firm does not have a large number of debtors. However, it can use the method of writing off debts or placing interest for the consumers who take a long period before repaying their debts.

The current ration financial key performance indicator is computed by dividing the current assets by the current liabilities. In 2015, the current ratio of the company is 2677/2168 = 1.2 while in 2016, 2487/ 1942 = 1.3. Therefore, it is evident that the current ratio of the company of the company reduced from the previous year. However, ideally, current ratio should be between 1.5 and 3. The current ratio indicates that the company has a small capability of paying its bills.

Non-financial key performance indicators

The number of customers that a company has is an indication of how the company is performing. A rise in the number of customers purchasing the products of the firm is an indication that it is performing well (Parmenter, 2007). Furthermore, if the number of new customers increases then it is an indication that the needs and preferences of the existing consumers are met. Responsible investment is another non-financial key performance indicator. A company should have a good investment capability to show that it is growing. Having a high percentage of investment capabilities is an indication that the firm is performing well (Marr, 2012). The cultural entropy is also used in measuring the amount of limiting or negative values that exist in a company which can lead to unproductive work. If the cultural entropy is low, then this indicates that the firm has a healthy culture.

Donating to the community is another important factor in determining is the company is performing well. It indicates that the company is concerned about its community and it is doing something important to give back to the community (Parmenter, 2007). Employee satisfaction and engagement allows a company to create a workforce which is engaged. Increasing the morale of the employees makes them put more effort into their activities. Therefore, when a company gives its employees incentives, and they put more effort in their different activities, then it is an indication that it is performing well.

The quality of work produced by a firm is a non-financial key performance indicator. It is evident that RAD is performing well in quality because 75% of the customers usually proceed with the projects after they are designed. Offering quality products may result in an increase in sales and profits of the organization. Offering good customer service to the customers helps in providing good experience as they are satisfied with the products of the firm (Marr, 2012). Making the consumers feel valued will give the firm more business in the future. Additionally, when the employees have good interactions with customers, then it is an indication that it is performing well.

Informal conversations and surveys with the employees help the firm to assess its level of consumers service that the firm is currently providing. Public image is also used when measuring the non-financial key performance of accompanying (Parmenter, 2007). When a company improves the way the general public views it, then it is an indication that it is performing well. When the general company views a company well, then it means it can make stronger relationships with the community. The aim of every company should be to maintain its professional image (Marr, 2012). Donating funds and time to the charitable organizations helps in establishing the firm as a fixture in the society.

Reasons for decline in profitability

The increase in costs incurred by a company may have resulted to decrease in profit. The cost of labor per hour paid to the employees are high (Pwc, 2013). Additionally, the cost the company uses in purchasing the raw materials is high which shows that the company uses much of its capital in paying the labor costs. Additionally, the fixed costs of the company are high. Thus, the firm should produce a lot of its product for it to benefit from the economies of scale. The high fixed costs of the company are the reason why the profitability is decreasing. The decrease in the sales is another reason why the profitability of the company has declined.

In comparing the sales of the company in the financial year 2015 and 2016, the sales declined in 2016. The decrease in the sales of the company may be as a result of pricing issues. The prices charged by the firm on its products are low. The prices are almost similar to the cost of producing the products. On the other hand, the competitors might have dropped their prices which cause the firm to shift. In the case of this company, the competitors are a non-issue because 75% of the customers continue with their projects after the company had designed them. Creativity changes is another strategy that can be used to determine the reason for the decrease in sales (Osburg & Schmidpeter, 2013). The company might have designed its products without testing.

Although the financial costs of the company declined from the previous year, the costs are still high because the company is small. The high financial costs might have need caused by increased interest rates or even increased capital expenditure (Osburg & Schmidpeter, 2013). Another reason why profitability of the company decreased may be increased competition. The market of the products the company is selling is very competitive. Thus, the consumers might have resolved to purchase products from the companies that are charging cheaply. Furthermore, in considering the type of business the company is doing, it is easy for new firms to enter the market as compared to the other industries.

The decline in demand for the products sold by the company resulted in declining in profitability. The decline in the demand is evident through the cost...

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