What are the essential Financial KPI’s a business should track when applying for business finance?

Applying for business finance can bring broad benefits for a company looking to expand, invest in new initiatives or simply boost cash flow. However, simply making an application does not guarantee success, a potential lender will want to take an in-depth look at the financial health of the business and key performance indicators (KPIs) are one of the most effective ways to demonstrate this.

By tracking and managing financial KPIs a business will get a better understanding of their strengths and weaknesses whilst also putting them in a strong position to present solid and accurate data when making an application for business finance.

Here are 8 essential financial KPIs which every business should track to improve their chances of securing business finance.

1. Revenue growth rate – the rate at which the revenue of a business increases or decreases over a set period. A steady increase will indicate the company is generating a strong level of sales and in a good position for expansion. Lenders will want to see consistent growth in revenue as it demonstrates good profitability and a strong business model.
2. Gross profit margin – the percentage of revenue which exceeds any costs of goods. By holding a high gross profit margin, a business can easily cover operating costs whilst also making a healthy profit. It will demonstrate to lenders that the business has a viable operating model, is able to manage production costs and generate strong levels of revenue.
3. Operating cash flow – total amount of cash generated through core business operations. A healthy level of operating cash flow is a strong indicator of a company’s liquidity along with its ability to meet short-term financial obligations. A lender will want to see that the business is generating enough cash from its operations to repay any future finance.
4. Debt-to-equity ratio – balance between the company’s debt and shareholders’ equity. Lenders will assess the debt-to-equity ratio to evaluate any financial risk. Obviously the lower the ratio, the preferable it will be. This indicates that the business is relying on its equity (investments) rather than debt to fund the operations.
5. Current ratio – a key indicator of liquidity. A current ratio is the ability of a business to pay off any short-term liabilities with its short-term assets. If a business has a ratio score of over 1 then it demonstrates that it has more assets than liabilities which means its financial stability is strong and will show as favourable to future lenders.
6. Customer acquisition costs – costs associated with acquiring new customers. It is important that a business pays attention to this and aims to keep these costs low. The acquisition cost needs to be considerably lower than the lifetime value for that customer. Keeping low acquisition costs will show a lender that the business can grow efficiently.
7. Return on assets – how effectively a company can use its assets to generate profit. By demonstrating a high return on assets, a business is showing that the management team is accurately using company assets to generate future earnings. This will be attractive to lenders as it shows good operational efficiency.
8. Net profit margin – a percentage of revenue that remains after all expenses have been deducted. Arguably net profit margin is one of the clearest indicators of profitability. It will show if a business is making a healthy profit and holds a strong position to repay any future debts.

By tracking these essential financial KPI’s a company can fully understand its financial health. It also helps to present a strong case when applying for business finance. Lenders will want to see growth, good debt management and strong cash flow.

Finally, it is always advisable to consult with business finance specialists when applying for funding.

If you need help, please call us on 01993 706403 or e-mail enquiries@ngifinance.co.uk.