The Main Financial Indicators to Put Into Practice
To maintain competitiveness in the market and to expand the company it is essential that the manager is in total control of finances. To be sure, after all these are the resources providing means for short-term, medium and long-term investments so as to ensure profitability of business. For this reason, the manager should keep a close eye on financial indicators.
These metrics are intended to offer serious statistics for even more reliable decision-making. However, even if they are important, many entrepreneurs still question their application.
If you too want to get acquainted with even more interesting facts, keep reading till the end of this article. Further down, we will explain how important it is to monitor major financial indicators, and even how to calculate them!
What are Financial Indicators?
As the term suggests, these financial ratios are quantitative metrics that indicate the real financial situation of your company based on accounting results. The goal is to enable the analysis of business performance and results and, thus, guide decision-making.
These metrics then form a database that will allow the entrepreneur to understand the context in which the organization finds itself-as mentioned earlier, financially speaking. This again allows for developing the best strategy to achieve desired goals.
Through financial economic indicators, much can be shown or revealed, like whether the company is profitable or not; whether there is a lot of debt, whether there is a little debt, the margin per product, and many more data. In practice, all of these points are very important for the maintenance and development of the business.
Why is It Important to Track These Metrics?
When it comes to money, it is essential to have reliable data. Since indicators are calculated based on the history of operations, they represent the ideal tool for understanding the performance of the business, as mentioned.
Furthermore, these metrics help determine realistic goals and the most appropriate initiatives to achieve them. In other words, financial indicators act as a “compass” that guides the manager towards the most profitable path. In fact, since there are several indexes, it is possible to identify the institutional situation from different aspects.
However, many entrepreneurs, especially those who own small and medium-sized businesses , do not usually take these metrics into account. As a result, they only base their calculations on gross or net revenue. The fact is that this is not enough to analyze the company’s performance and to chart the best path to gain more market share.
What are The Main Financial Indicators?
As we have already mentioned, there are several indicators. Therefore, it is possible to carry out numerous types of analyses according to general or specific institutional objectives.
To make the correct calculation, however, it is important to use accurate data, which you will find in the company’s statements, such as cash flow, balance sheets, Income Statement (IS), Balance Sheet, among others. Below, check out the main metrics.
- Gross margin
- EBITDA margin
- Net margin
- Contribution margin
- Return on Investment — ROI
- Breakeven point
- Average ticket
Gross Margin
This indicates gross profit as a percent and is intended to indicate the effectiveness of the organization relative to the sales. Its computation is straightforward since it only requires total revenue and the cost of goods sold.
EBITDA Margin
This indicator is widely used in the market — especially by companies that want to raise financial resources . After all, it shows the profitability of the business, taking into account its operational results.
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) refers to the profit obtained before the payment of interest and taxes, depreciation and amortization. So, to calculate it, simply apply the following formula :
EBITDA margin = (EBITDA / revenue) x 100
The firm will be more lucrative the bigger the margin. Stated differently, the higher its efficiency in producing profit.
Net Margin
This financial indicator measures a business’s net profit as a percentage. Its difference from gross margin lies in the composition of the calculation. In other words, the metric takes into account all expenses, both indirect and direct.
Contribution Margin
A measure of the percentage of goods sold that actually contributes to paying fixed costs . Thus, the contribution margin is simply arrived at by subtracting the variable costs from the sales price.
Return on Investment — ROI
This is one of the most widely used financial indicators in decision-making since it measures how much an investment yields over a certain period. Therefore, it is a metric widely used in simulations and financial planning to analyze whether it will be beneficial for the company to make a certain investment. Its formula is as follows:
ROI = [(result obtained – investment contributed) / investment contributed] x 100
Breakeven Point
The break-even point is when the revenues and expenses are equal. Thus, the indicator can be considered to be similar to the minimum amount that the company has to cover all the expenses without facing any losses.
For this reason, your result ought to be as low as possible, because the sooner the business will reach the break-even point, the sooner it will start making a profit. The formula is as follows:
breakeven point = (fixed costs + fixed expenses) / contribution margin in percentage
Average Ticket
Basically, the average ticket reveals how much, on average, each consumer spends in your business. The interesting thing is that its calculation can be done considering different periods, such as month, two-month, half-year or year.
To find out the indicator, use the formula:
average ticket = total revenue/number of sales
As you can see, there are several financial indicators, and each has a distinct function. It is thus advised to employ multiples and select financial indices that align with the goals of your business. You will be able to identify the most effective tactics for reaching the intended objectives by evaluating them.