5 Working Capital KPIs To Pay Attention To

Keeping regular tabs on your company’s financial performance is vital, and not just as emergency measures in tough economic times. Dynamic monitoring fosters agility and confidence, enabling you to move quickly to seize opportunities, or to retrench when you spot difficulties on the horizon.

Tracking financial key performance indicators (KPIs) will allow you to anticipate the future growth of your business and steer your relations with partners, banks, investors, suppliers and customers. Here are five working capital KPIs that you should monitor.

WCR measures the financial resources required to cover the lag between outgoing and incoming payments and 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.

As a key indicator, it provides a real-time assessment of the company’s cash position, indicating to what extent you can cope (or not) with an unforeseen event, such as late payment or a payment default.

It is the proportion of a business’ assets that are financed by debt. This ratio measures the extent of your business’ leverage.

The debt ratio is critical to keep an eye on your company’s debt level. Armed with this information, you can look to the future with peace of mind and take fully informed decisions. For example, if buying a particular machine is essential to grow the business, you can choose to finance the purchase by taking out a new loan or by bringing new investors into the firm’s capital.

These two very different strategies will have specific impacts on your business, hence the need to support your decisions with quantitative indicators. Calculating the debt ratio also provides insights into your cash flow and financial independence.

“Cash flow” refers to the movements of money into and out of a business – for example from operations, investing and financing. Free cash flow reflects the cash you have available, or free to use.

A cash flow forecast is based on estimates of these movements in the future. By updating your cash flow forecast on a regular basis, say weekly or even daily, your assessment of coming expenditures and revenues will be closely aligned with the actual situation of your business.

Free cash flow = net income + depreciation/amortisation – change in working capital – capital expenditure

Tip: A cash flow forecast is always evolving and should therefore be reviewed regularly, at least weekly.

It represents what percentage of sales has turned into profits. There are several types of profit margin. The main ones are:

• Gross profit margin: the difference between the revenue linked to product sales and the cost of goods sold (COGS).
• Operating profit margin: the percentage of profit produced by a business from its total revenue and after paying variable cost, but before paying tax or interest.
• Net profit margin: the percentage of profit produced by a business from its total revenue and after paying variable costs and tax or interest.

You can use these KPIs to estimate the profit generated by your company. Margin is dictated by different factors, such as the size of the company and the volume of goods produced. Generally speaking, as sales volumes increase, so does the profit margin. 

Gross profit margin = total revenue – cost of goods sold (COGS)

Operating profit margin = operating profit / revenue

Net profit margin = net profit / net revenue

Tip: Like the cash flow forecast, your profit margin is always changing in response to a wide array of factors, from volume discounts to production costs. Tracking this KPI on a more or less daily basis will allow you to make quick adjustments. As a starting point, revenue forecasting is necessary to accurately project future numbers.

Keeping a close eye on these indicators allows you to stay in control of your business and provides a solid foundation for all the strategic decisions you need to make. For more tips and advice on business financial monitoring, check out our latest insights.