With proper metrics monitoring, company owners can have complete insight into their company’s work. Without even going into metrics, there is already enough financial responsibility to make your head spin: planning, tax compliance, accounting, budgeting, sales revenue, salary distribution, etc. But successful management requires more than that.
It takes a selective approach to single out business data that make the most significant difference or the markers that influence your line of work the most. Being a cornerstone of any company, financial management needs to be thorough and follow all relevant metrics so the business can thrive.
Still, too many promising companies fail because of shoddy management, even if they offer quality products and services. In other words, they haven’t mastered financial metrics to compete successfully in the market. Without doing that, any ambitious business owner is doomed from the start. Click here for more.
What are Financial Metrics?
All companies deal with metrics on some level, even if they might not be aware of it. If there’s cash flow, that’s a metric in itself. But there are many more, all equally important for your company’s operations.
In short, financial metrics are indicators or markers of a company’s overall work. They’re the pieces that form the complete financial picture, providing the most relevant and essential data for your operations.
You think of them as the scoreboard in a basketball or football game: however, you manage your finances, effectively or not, it shows up there. That makes them the best reference points that reveal your weaknesses and point you in the right direction.
There’s no room here for an academic course on financial metrics, but we’ll go over the most important ones to help you get the picture.
Gross and Net Profit Margins
Profit is the alpha and omega of all companies. It’s why they offer their products and services in the first place. But how exactly do you measure profit? For all the new divers in the business waters, there are two types: gross and net profit margin.
The gross profit shows how much revenue is left when subtracting sold goods from the total revenue. As you know, production includes expenses other than manufacturing costs, such as taxes and interest. Put simply, the gross profit margin disregards all costs not directly related to the main production, also known as overheads.
But if you need to see your actual earnings when you take out all expenses, directly related or not, you must look at the net profit margin. It is gross profit minus all tax, operational, and interest costs (and all other fees excluded from the gross income.)
Some call it total comprehensive income or simply net income, which all refer to the same basic thing. Find more info at https://smallbusiness.chron.com/advantages-financial-ratios-3973.html.
Current and Quick Ratio
Now we are moving to the liquidity zone, which is concerned with a company’s ability to turn assets into money. Businesses need to pay their short-term obligations, so liquidity helps them stay afloat with these daily finances.
Current ratio falls in the group of liquidity ratios. As the name suggests, it shows whether a business can cover short-term (within one year) responsibilities with their current assets, the ones that are instantly available. Sometimes company owners overestimate their powers and take on obligations they can’t pay. This usually happens because they’re unaware of their current ratio.
On the other hand, quick (or acid test) ratio reveals whether your business can manage short-term obligations. It takes into consideration the assets that offer the greatest liquidity, like securities, accounts receivables, and of course, cash. Companies often face situations where they need to react fast to cover expenses. Selling inventory is not the smartest idea, but converting highly liquid assets are.
There’s another liquidity ratio worth considering called days sales outstanding, known as DSO (you may find it under days receivables). Here, you get the amount owed by your customers for products and services that are still unpaid. Or, you can look at it as the total number of days needed for a company to get all its receivables following a sale.
In the business world, the term leverage refers to borrowed assets used in a certain investment. Companies are often not able to complete projects with their own capital, so they use debt to get things done. In this way, they get increased returns from a given project. But if the investment doesn’t go as planned, the downside risk grows as well.
Companies and investors use leverage with equal success. The former often fund their assets with leverage instead of issuing stock, and the latter use this financial metric to grow potential returns in the future. As you can see, debt can be highly useful if you know how to employ it strategically.
There are many more financial metrics to consider if you’re striving to achieve greater commercial success for your company. Data analytics is an invaluable source for any business, providing control and room for financial growth.