Even if you don't have experience in finance, knowing the fundamentals of financial accounting can help you make better decisions and increase your chances of success in the workplace. Gaining insight into your company's financial performance measurement process will help you make more valuable contributions to your day-to-day tasks.
For the uninitiated, finance can seem scary. Here is a list of the most important financial measures that managers should be aware of in order to assist you feel more at ease while discussing and understanding financial problems.
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| Mastering Financial Success |
FINANCIAL KPIs: WHAT ARE THEY?
Financial KPIs, or key performance indicators, are measurements that businesses use to monitor, assess, and evaluate their financial situation. These financial KPIs are divided into several groups, such as valuation, profitability, liquidity, solvency, and efficiency.
Gaining a grasp of these measures will put you in a better position to assess the financial performance of the company. Afterwards, you can apply this understanding to improve departmental or team goals and support important strategic goals.
In the form of email updates, dashboards, or reports, these data and KPIs have to be shared with management on a weekly or monthly basis and made available internally. Financial statement analysis is a useful tool for familiarizing yourself with measures even if they are not easily accessible.
A financial statement analysis: what is it?
financial statements is the process of looking over important financial records to see how the business is doing. Although a wide variety of financial statements can be examined throughout this procedure, some of the most significant ones—particularly for managers—include the following:
- Balance Sheet: Asummary of the owners' equity, liabilities, and assets of a company as of a particular date.
- Income Statement:A summary of a company's earnings for a given time period that includes sales, costs, and profits.
- Cash Flow Statement: Astatement that shows the relationship between operating, investing, and financing operations on the income statement and balance sheet and how it affects cash flow.
- Annual Report: A document outlining the business's activities and financial situation; usually consists of the aforementioned documents plus additional commentary and insights from significant company personnel.
13 MEASURES OF FINANCIAL PERFORMANCE TO WATCH
The financial statements mentioned above usually contain the indicators listed below, which are among the most crucial for managers and other critical stakeholders in an organisation to comprehend.
1. Margin of Gross Profit
After subtracting the cost of products sold, the fraction of revenue left over is calculated using a profitability ratio known as gross profit margin.Operating costs, interest, and taxes are not included in the cost of goods sold, which only includes the direct cost of production. Put otherwise, gross profit margin represents the profitability of a product or item line exclusive of overhead.
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| Margin of Gross Profit |
2. Net Profit Margin
When all business costs—such as cost of goods sold, operational expenditures, interest, and taxes—are deducted, the proportion of revenue and other income that remains is known as the net profit margin. Because net profit margin accounts for all associated costs in addition to the cost of products sold, it is a more accurate indicator of overall firm profitability than gross profit margin.
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| Net profit margin |
3. Working Capital
The amount of operational liquidity that a company has available to fund its daily operations is measured by its working capital.
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| Working Capital |
4. Current Ratio
A liquidity measure called the current ratio can tell you whether a company has enough current assets and liabilities to cover its short-term debt, or debt that is due in less than a year.
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| Current Ratio |
5. Quick Ratio
Another kind of liquidity ratio that assesses a company's capacity to meet short-term obligations is the quick ratio, sometimes referred to as the acid test ratio. Only highly liquid current assets are used in the quick ratio's numerator, including cash, marketable securities, and accounts receivable. It is assumed that some current assets, such as inventory, are not always simple to convert into cash.
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| Quick Ratio |
6. Leverage
Financial leverage, sometimes referred to as the equity multiplier, is the process of purchasing assets with debt. In the event when equity is used to finance every asset, the multiplier is 1. As debt grows, the multiplier rises from one, illustrating the debt's leverage effect and ultimately raising the business's risk.
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| Leverage |
7. Debt-to-Equity Ratio
A solvency ratio called the debt-to-equity ratio indicates how much of a company's funding comes from equity as opposed to debt. This ratio illustrates the ability of shareholder equity to pay off all debt in the case of a business crisis, which sheds light on the solvency of the company.
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| Debt-to-Equity Ratio |
8. Inventory Turnover
Inventory turnover is a metric of efficiency that quantifies the frequency with which a business sells all of its stock in an accounting period. It sheds light on whether a business has too much inventory in relation to its volume of sales.
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| Inventory Turnover |
9. Total Asset Turnover
An efficiency ratio called total asset turnover assesses how well a business uses its assets to produce income. The company performs better the higher the turnover percentage.
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| Total Asset Turnover |
10. Return on Equity
Divide net profit by shareholders' equity to find the profitability ratio known as return on equity, or ROE for short. It shows how well the company can use equity investments to generate returns for investors.
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| Return on Equity |
11. Asset Return
Divide net profit by average assets for the company to find return on assets (ROA), another profitability statistic that resembles ROE. This indicates the degree to which the business is making the most of its assets and available resources in order to increase earnings.
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| Asset Return |
12. Cash Flow from Operations
The amount of cash generated by the company's operations is measured by operating cash flow. A high number would indicate that there is cash on hand to expand operations; a negative number would indicate that further funding is needed to keep things running as they are. One of two methods—direct or indirect—can be used to compute the operating cash flow, which is typically located on the cash flow statement.
13. The cyclical nature of things
Seasonality is a way to quantify how the time of year impacts the financial results and figures of your business. In the event that your industry has highs and lows, this measure will assist you in eliminating complicating variables and interpreting the data as intended.
It's crucial to remember that there are no absolute good or poor financial KPIs. To determine whether your company's financial performance is increasing or decreasing and how it is doing in comparison to others, metrics must be compared to previous years or competitors in the same industry.
THE BOTTOM LINE
You can keep an eye on a variety of additional financial KPIs to get a sense of how your business is performing and how your activities are affecting the advancement of common objectives. If money isn't your thing, these financial KPIs are a terrific place to start. It is imperative that managers acquire the crucial financial accounting talent of comprehending how these measurements impact corporate strategy.
