Tracking the Company’s measurement and Evaluating
Techniques for Tracking the Company’s Output and Evaluating – While you may not have a financial background, a simple understanding of the essential ideas of financial accounting can help you enhance your decision-making process and your prospects of job success. You can deliver more value in your everyday operations if you have a deeper understanding of how your firm assesses financial performance.
Finance can be scary to those who are unfamiliar with it. Here’s a list of the top financial metrics managers need to learn to assist you to become more comfortable knowing and speaking about financial subjects.
What are Financial KPIS?
Financial KPIs (key performance indicators) are measurements used by businesses to track, evaluate, and assess their financial health. These financial KPIs are classified into several groups, including profitability, liquidity, solvency, efficiency, and valuation.
Understanding these measures will put you in a better position to assess how the business is functioning financially. You can then apply this knowledge to revise your department’s or team’s goals and contribute to important strategic objectives.
These measurements and KPIs should be made available to management internally and communicated on a weekly or monthly basis via email updates, dashboards, or reports. If they are not widely available, you can nevertheless acquire acquainted with the metrics through financial statement analysis.
WHAT IS FINANCIAL STATEMENT ANALYSIS?
The practice of evaluating essential financial records to acquire a better understanding of how the organization is operating is known as financial statement analysis. While many different forms of financial statements can be evaluated as part of this process, some of the most essential, particularly for managers, are as follows:
- Balance Sheet: A statement that shows a company’s assets, liabilities, and equity at a certain period in time.
- Income Statement: A statement that summarises a company’s sales, costs, and earnings over a given time period.
- Cash Flow Statement: A statement that captures how balance-sheet and income-statement operations, classified as operating, investing, and financing, affect cash flow.
- Annual Report: A document that details the firm’s activities and financial situations, and usually include the documents described above, as well as additional insights and narratives from key figures within the company.
13 FINANCIAL PERFORMANCE MEASURES TO MONITOR?
The metrics listed below are often found in the aforementioned financial statements and are among the most crucial for managers and other key stakeholders within a firm to grasp.
1. Net Profit Margin
Net profit margin is a profitability ratio that determines what proportion of sales and other income remains after deducting all business costs such as costs of products sold, operational expenses, interest, and taxes. As a measure of overall profitability, net profit margin differs from gross profit margin in that it considers not just the cost of products sold, but all other related expenses.
Net Profit Margin = Net Profit / Revenue * 100
2. Working Capital
The working capital is a measurement of a company’s available operating liquidity that can be utilized to fund day-to-day operations.
Working Capital = Current Assets – Current Liabilities
3. Gross Profit Margin
The gross profit margin is a profitability ratio that calculates the proportion of revenue that remains after deducting the cost of goods sold. The cost of products sold is the direct cost of production and excludes all operational expenditures, interest, and taxes. In other words, the gross profit margin is a measure of profitability that excludes overheads for a single product or item line.
Gross Profit Margin = (Revenue – Cost of Sales) / Revenue * 100
4. Current Ratio
The current ratio is a liquidity ratio that determines whether a company can meet its short-term obligations (those due within a year) with its current assets and liabilities.
Current Ratio = Current Assets / Current Liabilities
The use of debt to purchase assets is referred to as financial leverage, also known as the equity multiplier. The multiplier is one if all of the assets are financed by equity. As debt grows, the multiplier rises from one, reflecting the debt’s leverage impact and, ultimately, raising the business’s risk.
Leverage = Total Assets / Total Equity
6. Inventory Turnover
Inventory turnover is an efficiency ratio that calculates how many times a company’s entire inventory is sold in a given accounting period. It reveals whether a company has excessive inventory in relation to its sales levels.
Inventory Turnover = Cost of Sales / (Beginning Inventory + Ending Inventory / 2)
7. Operating Cash Flow
Operating cash flow is a measure of the amount of cash a company has as a result of its operations. This metric could be positive, indicating that cash is available to expand operations, or negative, indicating that extra financing is necessary to maintain current operations. The operating cash flow is often included in the cash flow statement and can be calculated in two ways: direct or indirect.
8. Quick Ratio
Another sort of liquidity ratio that assesses a company’s capacity to meet short-term obligations is the fast ratio, often known as an acid test ratio. In its numerator, the quick ratio only includes highly liquid current assets such as cash, marketable securities, and accounts receivable. The premise is that certain current assets, such as inventory, are not always easy to convert into cash.
Quick Ratio = (Current Assets – Inventory) / Current Liabilities
9. Debt-to-Equity Ratio
The debt-to-equity ratio is a solvency ratio that determines how much a company finances itself through equity vs debt. This ratio indicates the business’s solvency by representing the ability of shareholder equity to cover all debt in the case of a business downturn.
Debt to Equity Ratio = Total Debt / Total Equity
10. Total Asset Turnover
Total asset turnover is a revenue-generating efficiency ratio that assesses how well a company utilizes its assets to produce money. The higher the turnover ratio, the better the company’s performance.
Total Asset Turnover = Revenue / (Beginning Total Assets + Ending Total Assets / 2)
11. Return on Equity
Return on equity, abbreviated as ROE, is a profitability ratio calculated by dividing net profit by shareholders’ equity. It demonstrates how well the company can use equity investments to generate profits for investors.
ROE = Net Profit / (Beginning Equity + Ending Equity) / 2
12. Return on Assets
Return on assets, or ROA, is a profitability ratio comparable to ROE that is calculated by dividing net profit by the average assets of the organization. It measures how successfully the company manages its available resources and assets to maximize profits.
ROA = Net Profit / (Beginning Total Assets + Ending Total Assets) / 2
Seasonality is a measure of how the time of year affects the financial data and outcomes of your firm. If you work in an industry that is affected by high and low seasons, this metric will assist you in sorting through the factors and seeing the figures for what they truly are.
When it comes to financial KPIs, it’s crucial to remember that there is no ultimate good or bad. Metrics must be compared to previous years or competitors in the sector to determine whether your company’s financial performance is improving or falling, as well as how it compares to others.
The Final Line
There are numerous more financial KPIs you may track and analyze to gain a better understanding of how your organization is performing and how your actions affect progress toward shared goals. If you’re new to finance, the financial KPIs described above are an excellent place to start. Understanding how these indicators influence corporate strategy is a crucial business skill that all managers must acquire.