While you may not have a financial background, a simple grasp of the essential ideas of financial accounting will 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 grasp of how your organisation assesses financial success.
Finance may be scary to those who are unfamiliar with it. Here’s a list of the top financial metrics managers should learn to assist you to become more comfortable knowing and speaking about financial subjects.
What are Financial KPIs?
Financial KPIs 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 organisation is functioning financially. You may then apply this knowledge to revise your department’s or team’s goals and contribute to crucial strategic objectives.
These measurements and KPIs should be made available to management inside and delivered on a weekly or monthly basis via email updates, dashboards, or reports. If they are not widely available, you may nevertheless become acquainted with the metrics through financial statement analysis.
What is Financial Performance?
Financial performance is a subjective evaluation of a company’s ability to employ assets from its principal method of operation to create revenue. The phrase is also used to describe a company’s overall financial health during a certain time period.
Financial performance is used by analysts and investors to evaluate similar enterprises in the same industry or to compare industries or sectors in aggregate.
A company’s stakeholders include trade creditors, bondholders, investors, workers, and management. Each group is interested in monitoring a company’s financial performance. The financial performance of a corporation determines how successfully it earns income and manages its assets, obligations, and the financial interests of its stakeholders and investors.
There are several ways to assess financial success, but all measurements should be examined together. Line items such as revenue from operations, operating income, and cash flow from operations, as well as total unit sales, might be employed.
In addition, the analyst or investor may want to go further into the financial accounts to search for margin growth rates or any falling debt. Six Sigma approaches are centred on this element.
What is Financial Statement Analysis?
The practice of evaluating essential financial records to acquire a better understanding of how the organisation is operating is known as financial statement analysis. While many various forms of financial documents can be evaluated as part of this process, some of the most significant, particularly for managers, are:
- Balance Sheet: The balance sheet is a snapshot of an organisation’s finances as of a specific date. It offers an overview of the company’s asset and liability management. On the balance sheet, analysts may discover information on long-term vs. short-term debt. You can also learn about the company’s assets and the ratio of assets funded by liabilities against stockholders’ equity.
- Income Statement: The income statement summarises the full year’s activity. The income statement begins with sales and finishes with net income. The income statement, often known as the profit and loss statement, shows the gross profit margin, cost of goods sold, operational profit margin, and net profit margin. It also offers a summary of the number of shares outstanding, as well as a comparison to the previous year’s performance.
- Cash Flow Statement: The income statement and balance sheet are combined to create the cash flow statement. Because it offers a reconciliation between net income and cash flow, the cash flow statement is considered by some analysts to be the most significant financial statement. Here, analysts can see how much the business spent on dividends, capital expenditures, and stock repurchases. The source and purposes of cash flow from operations, investment, and borrowing are also provided.
- Annual Report: A document that covers the company’s operations and financial situations, as well as additional insights and narratives from key figures inside the organisation.
Financial performance indicators, also known as key performance indicators (KPIs), are measurable statistics that are used to determine, track, and forecast a company’s economic well-being.
They serve as tools for both corporate insiders (such as management and board members) and outsiders (such as research analysts and investors) to examine how well the business is performing, particularly in comparison to competitors, and to identify the company’s strengths and flaws.
The following are the most often-used financial performance indicators:
- Gross profit/gross profit margin: the amount of revenue earned from sales after deducting manufacturing expenses, as well as the percentage of revenue earned per dollar of sales.
- Net profit/net profit margin: the amount of income from sales remaining after deducting all connected company expenditures and taxes, as well as the corresponding earnings per dollar of sales ratio.
- Working capital: money that is readily available or extremely liquid and is utilised to sustain ongoing operations
- Operating cash flow: the sum of money brought in by ongoing company activities
- Current ratio: the current ratio is a measure of solvency that is calculated by dividing total assets by total liabilities.
- Debt-to-equity ratio: the total liabilities of a corporation divided by its shareholder equity.
- Quick ratio: another measure of solvency is the quick ratio, which measures the percentage of relatively liquid current assets (cash, securities, and accounts receivable) to total liabilities.
- Inventory turnover: it refers to how much inventory is sold in a certain time period and how frequently the complete inventory is sold.
- Return on equity: it is calculated by dividing net income by shareholder equity (a company’s assets minus its debts).
How can I improve my financial situation?
There are various strategies to improve a company’s financial performance. The first step, of course, is to try to identify any blockages or friction spots, as well as the source of these issues. Other approaches include:
- Improving cash flow: maintain better track of income and expenses, increase account receivable collection, and modify payment choices and rates as needed.
- Getting rid of unwanted/unused assets
- Budget revisions
- Lowering costs
- Applying for government loans or subsidies; consolidating or refinancing current debt
- Analysing financial documents and performance indicators, ideally with the assistance of a professional
Conclusion
There are several more financial KPIs you may track and analyse to have a better understanding of your company’s performance and how your actions affect progress toward common goals.
If you’re new to finance, the financial KPIs described above are an excellent place to start. Understanding how these measurements impact corporate strategy is a fundamental financial accounting ability that all managers should acquire.
A company’s financial performance is determined by figures. However, it does leave an image of the organisation and its stability. Any serious investor trying to properly understand and value an organisation must do a financial analysis of its financial statements, which are summarised in annual reports.
However, it is equally critical to understand that financial success represents the past and is seldom a precise predictor of the future. It also does not exist in a vacuum. Those assessing a company’s financial performance should constantly analyse it in relation to other, comparable businesses, the industry as a whole, and the company’s history.
