Discover the best financial indicators to assess the financial health of your business.
In the dynamic world of business, the ability to maintain a cash flow is a determining factor for success and long-term sustainability. Financial indicators play a key role in monitoring and assessing the condition of business accounts.
In this article, we're going to present the 11 main indicators to keep a close eye on in your company. You'll see that each one considers different aspects - so there's nothing to stop you adopting two, three or even more of these metrics in your business. Read on!
1. net margin
The net margin is a financial indicator that shows the percentage of profit a company makes in relation to its total revenue, after subtracting (deducting) all costs, expenses and taxes. In other words, it shows how much of each dollar generated in sales turns into actual net profit for a business
The indicator's main function is to guide decision-making regarding possible new investments and internal improvements - in addition, of course, to pointing out the company's ability to generate profits.
Another important feature is that the net margin also helps to understand whether or not a company's shares are more highly valued - and helps entrepreneurs to identify opportunities for business expansion.
2. Contribution margin
The contribution margin basically indicates the profit generated by each product sold. In this way, it signals the exact amount that the business needs to collect from each item sold in order to cover its production costs and still generate a profit.
For organizations that provide services, the calculation of the contribution margin needs to include all expenses, such as salaries, infrastructure and software costs.
A positive contribution margin is essential for business sustainability. Similarly, a negative figure signals the need to optimize costs, increase sales or review the pricing of services. This is the only way for the company to close its accounts in the black.
3. Cost margin
Similar to the contribution margin, the cost margin checks whether the sale of a product is sufficient to cover all its costs. However, there is a fundamental difference: it is used to indicate whether the sale of a given product covers all its production and/or acquisition costs (in the case of resellers)
This metric allows managers to adjust financial demands to commercial targets, determining the minimum sales to cover costs and generate profit. It's worth noting that monitoring cost and contribution margins together is very important to avoid bottlenecks in production and sales costs.
4. Break-even point
Also known by its English name break-even point, o break-even point indicates the minimum amount a company needs to earn in order to cover all the expenses it needs to run.
This includes day-to-day operating costs, infrastructure costs, taxes and taxes to which it is subject, among others. The break-even point answers a basic question: when will my company start to pay for itself?
Calculating the break-even point is essential for startups and IT companies, for example. This is because the indicator allows them to define precise pricing strategies, control spending efficiently and align expectations with investors.
The break-even point is a kind of safety indicator and provides information about the profits generated. If revenue exceeds the value estimated by the break-even point, it can already be considered a profit.
5. ROI
ROI is an eclectic indicator, as it is not only used in the financial sector. Known as Return on Investment, it can also be applied in other sectors, such as accounting, marketing, operations, sales, among others.
Basically, ROI indicates how much a company has earned in revenue in relation to a given investment - it could be the purchase of machinery, a batch of new computers or even a financial investment in another business.
Often, this return may not even be immediately financial. A company that adopts a new customer service policy and finds that customer approval has increased is an example of an investment in a flawed area that has borne positive fruit.
6. EBITDA
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), or LAJIDA in Portuguese (Earnings Before Interest, taxesis a financial indicator that shows a company's profit before excluding interest and tax expenses, as well as depreciation and amortization losses.
This financial indicator calculates the profitability of a business, considering only its operating activities. An interesting detail is that investors use it to compare the profit margin of companies in the same sector, regardless of their size or specific characteristics.
7. Billing
Turnover considers a company's total sales over a defined period. It is divided into two main categories: gross and net. The former represents the total value of sales, without deductions, covering everything that goes into the organization's cash flow.
Net sales, on the other hand, refers to the total value of sales after operating deductions such as fees, product returns and taxes have been removed.
This indicator is essential for evaluating the company's commercial performance, allowing new targets to be set for the sales team, internal improvements to be implemented, processes to be optimized and budget planning to be revised.
8. Profitability
Profitability works with one of the favorite concepts of any entrepreneur: profit. In this sense, it is a percentage indicator that works on absolute amounts.
Profitability indicates how much a business has actually earned from selling services and products. It also provides comparisons with previous periods. No wonder it's not uncommon to read news reports stating that "this company has increased its profitability by so many percent...".
Its calculation formula is simple:
Profitability = (net profit/total revenue) x 100
Revenue corresponds to the sum of all the business's receipts before any discounts are taken out. In this way, the exact profitability figure is arrived at when all production costs are deducted, such as raw materials, technologies used and infrastructure costs.
9. Average ticket
The average ticket represents the amount spent by each customer in your company over a defined period, which can vary between monthly, quarterly, biannually or annually.
This indicator is a valuable tool for both small businesses and large entrepreneurs, as it provides data for designing broader strategies. By analyzing each customer's ticket, it will be possible to understand their general purchasing pattern - and develop strategies accordingly, as well as marketing campaigns.
A low average ticket, calculated from the data of all customers, can indicate problems with product quality, customer service or ineffective advertising campaigns.
On the other hand, identifying higher tickets among customers with a similar profile to those who spend less offers the opportunity to investigate and replicate the strategies that encourage greater consumption.
10. Profitability
Profitability is a financial indicator that assesses the return on investments made, offering a comprehensive view of a company's financial performance.
Although it is similar to Return on Investment (ROI), profitability works from a broader perspective, taking into account all the organization's internal flows and investments. ROI, on the other hand, focuses on more specific investments and initiatives.
Unlike profitability, which estimates financial returns in general, profitability focuses on the returns obtained through direct applications in the company's operations. In other words, it measures how efficiently the company uses its resources to generate profit from its core activities.
11. ROE
Be careful not to confuse it with ROI: ROE stands for Return on Equity. This indicator shows whether the company manages to generate a profit from its own capital, the money invested by the owners or shareholders.
In this context, it is useful to find out if the company can make itself viable even without external investment, for example. It also indicates how well the organization uses its own capital to promote growth and profitability.
This is why ROE refers to the company's own equity. The concept has to do with the residual value of the assets a company still has after deducting all its financial liabilities.
In more practical terms, it indicates the amount that would be left over if the company sold all its assets and used the proceeds to pay off all its debts.
As we have seen in this article, financial indicators are fundamental to the success of any company, as they allow you to monitor business performance and generate complete reports, helping you to make strategic decisions.
Regular monitoring of financial indicators allows employees and their leaders to collect, manage and map relevant data, optimizing the management of business accounts. They also provide accurate information to measure the financial health of the enterprise.
As you can see from the text, financial indicators have different focuses and bases for calculation. ROI, for example, fulfills a different function from the profitability metric. This shows that adopting various measures is efficient for measuring financial health and understanding the current state of the cash flow of the business.
Do you need help to change the course of your company's financial situation? A CLM Controller accounting has professionals specializing in financial and accounting aspects who can help you in this endeavor.
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