Knowing the financial health of a company is essential so that the manager can make the right decisions for the business. There should be real-time monitoring of the most important financial performance indicators so that any deviations can be corrected before they have a significant impact on business results. In this article, we show you the 4 most important indicators of financial performance!
Profitability
This indicator reveals the value of the return on capital invested in the company. It is important to regularly realize if the investments we are making are bringing positive results for the company. This indicator is very easy to calculate, as it is enough to divide the net result of the company by the total of the asset. For example, if the manager invested € 10. 000 in business assets and had a return of € 1,500, means that it had a profitability of 15%. Many managers don’t often analyze this indicator, which means that they continue to invest in areas that don’t bring any positive results to the company.
Charges
This indicator gives us information about the company’s direct receipts over a given period of time and shows us which customers pay on time, which customers are responsible for most of the receipts, and which ones are the default ones. This information is essential to understand the cash flow and allows us to evaluate if the invoicing is feasible for the business to be sustained over time and gives us relevant information to see if we should suspend the rendering of services to heavily indebted clients for our company.
Break-even point
Also known as a critical point of sales, this indicator gives us the minimum necessary value of sales to cover all costs of the company without any loss. The break-even point is reached when sales equals total costs and expenses, and there is no profit or loss. To calculate it, simply add up the fixed expenses plus the variables and divide by the percentage of the contribution margin. This indicator helps the company to know exactly the minimum it needs to sell so as not to cause loss and it is impossible to set sales goals without knowing this value.
Liquidity
The equation between a company’s current assets and obligations gives rise to the current liquidity index, which indicates the ability of the company to meet its short-term obligations. To arrive at this amount, it is necessary to divide the asset by the liabilities and the ideal is that the result is greater than 1. If it is equal to 1, it means that it is very difficult to obtain profit and if it is less than 1 means that the business is not profitable and that there is no financial capacity to meet short-term obligations.
