When we hear that a person undertakes, we could say that all of us – or almost all of us – come to mind with words such as: business, profitability, success, money, etc. but you hardly ever hear about something as important and vital for a business as financial indicators.
When a person decides to undertake, he knows that he will have to invest: time, money and above all a lot of effort.
VIDEO | What matters most in the financial management of your business
Trusting in the success of a project is like throwing a dice at random and waiting for the number to come up; but, the good news is that he can always make good moves so that the number on the die is always in his favor and consequently, the path to the success of his project is flattened to advance quickly and easily without forgetting the most important thing: to get income.
If you are seriously thinking about starting a business or you already have your business idea underway but you have no idea how to ensure that it is on the right track or how to take care of the money you are investing, this post is for you.
Because we show you the fifteen main financial and management indicators that every entrepreneur should know to have a deep and, above all, very detailed vision of finances, sales, production and the business in general, in order to make much more assertive and strategic decisions.
Prepared?
So, start taking note!
What is a financial indicator?
An indicator or financial index is something that indicates or reveals a certain reality based on relating two elements within a whole. That is – and to put it even simpler – it is when you want to know what happens when something “A” is linked with something “B” and what effect the result “C” has on everything you are doing.
In the case of finance, a financial indicator is useful to identify what relationship exists, for example, between sales and profit. Or, the ratio of profits to accounts payable, and so on.
A financial ratio can help you answer all the questions about one of the most important resources your business idea has: money.
So, taking into account all of the above, we could say that the financial indicator is a sample of your performance. It is a portion within everything that your business implies that serves as a parameter for comparison and planning, because it allows you to measure how close or how far you are from achieving that objective that you set for yourself and based on this, create a plan based on achieving this indicator, for the growth and development of your business.
What are financial indicators for?
Taking a look at financial indicators could be useful for:
- Know the stability of the business and know if it is really generating any profit.
- Have clear data on the financial health of your business.
- They make it easy to determine the strengths and weaknesses of the enterprise in order to make decisions that allow correcting financial deviations that are out of the forecasts or that could generate irreparable losses.
As an entrepreneur, you need to know at all times how the financial health of your business is. Periodically reviewing basic financial ratios is essential to maintain the stability of the business and anticipate possible problems in the future, which could seriously compromise your money.
Types of basic financial indicators
Let’s see what are the types of basic financial indicators or ratios that any entrepreneur can use to take care of their money and ensure the success of their business:
Profitability indices
If you are wondering, how can I know if my business is really profitable? Well, you should know that there are certain mathematical formulas and financial indicators that are made to know exactly that. Some of them are:
1. Gross profit margin
It is one of the most recommended and used calculations by new entrepreneurs, because it allows you to determine exactly how much money you are earning from the sale of a product or service. In addition, many use this technique, also known as markup, to find out the average price that should be charged for a particular product or service.
Its formula is quite simple:
Gross profit = total income — cost of products or services
If you want to calculate the percentage margin of the gross profit:
Percent gross margin = gross profit / total revenue x 100
2. Operating margin
The operating or operating profit margin is calculated by dividing operating income (gross profit less operating expenses) by total sales. This financial and management indicator examines the relationship between sales and costs.
3. Net profit margin
The net profit margin is obtained once those expenses that are related to the business, fixed and variable, such as rent, bank loans, services (electricity, gas, water, cleaning) are deducted from the gross profit.
Its formula is as follows:
Net profit = gross profit — fixed and variable expenses
4. Net return on investment
This metric that expresses the relationship between what is invested and the benefit obtained from said investment. It is often used to rate whether the investment is financially worthwhile.
To calculate the net return on investment, it is necessary to subtract the value obtained or benefit obtained from the total value of the investment, and then divide that total by the value of the investment again.
To express this indicator as a percentage, it must be multiplied by 100.
5. Operational return on investment
It is the ratio of operating profit to total business assets. This metric evaluates the operational profitability (use of assets and operating expenses) that has originated on the assets.
6. Return on equity
Evaluates the profitability (before or after taxes) that the entrepreneur has when marketing their products or services.
Liquidity financial indicators
One of the priorities of any business is to optimize all the assets it has available; among them, liquidity occupies an essential role. Some liquidity indicators that could help to have this asset under control could be:
7. Current Ratio
The current ratio is part of the financial liquidity ratios, interpreting this formula will give us a perspective of the payment capacity of the short-term obligations of the business.
To calculate the current ratio, we use as a formula the division of current assets with current liabilities.
Current Ratio = Current Assets / Current Liabilities = N° times
It is recommended that the appropriate ratio for current liquidity be between 1.5 and 2 times.
8. Working Capital
This indicator is made to determine the capacity of the enterprise to carry out its activities normally in the short term. It is calculated considering the assets that remain in relation to the short-term liabilities.
When income exceeds expenses, it is facing a positive working capital. While negative working capital reflects a problem because it implies a need to increase current assets, that is, there are fewer profits and more debt.
9. Acid Test
It is a financial indicator that you can use to know the day-to-day solvency of your , that is, it measures your ability to pay in the short term. The formula to calculate it is:
Acid Test = (Current Assets- Inventories) / Current Liabilities
If you have a result greater than 1, you will have no problem meeting your short-term obligations. If the result is less than 1, it will indicate that you have problems coping with your short-term debts.
10. Cash Ratio
This indicator, also called cash ratio, is a ratio that allows knowing the true capacity of the business to meet its obligations in the short term. That is, without the need to resort to their assets.
The calculation of this indicator is quite simple, cash is considered and then it is divided by current liabilities, which basically represents the debts that must be paid in the short term. We refer, for example, to short-term bank loans (of less than one year) and debts with suppliers.
11. Solidity Ratio
By means of this indicator we will be able to know what is the proportion of Non-Current Assets financed by the entrepreneur’s own resources. If the figure is higher, it will be better since the investments will be financed in the long term with our own resources.
The formula is:
Own funds / Non-current assets.
Indebtedness indicators
Indebtedness does not have to be something negative for an entrepreneur, because it makes it possible for the business to operate during the first years with a greater margin of movement without the need to sacrifice parts of the business.
The important thing is to keep this index under control because obviously, the more debt, the more exposed and compromised the future of the business will be.
Some debt ratios that could be useful for new entrepreneurs could be:
12. Indebtedness
The debt ratio is used to interpret and analyze the proportion of assets in the business that are financed by debt. In addition, it helps to measure and understand the risk by dividing your external financing sources (credits and loans); between the internal ones, which are resources, assets and investment.
The formula to calculate the indebtedness of a business is:
Debt ratio = total liabilities / total assets
The result can be expressed as a decimal or percentage.
13. Short-term debt ratio
In addition to the general formula, we have a financial formula that can also indicate the relationship between the volume of a business’s own funds and the debts it maintains, both in the long and short term.
The formula is:
Short-term debt = current liabilities / equity
14. Long-term debt ratio
To find the long-term debt ratio, simply apply the following formula:
Long-term debt = non-current liabilities / equity
15. Working capital
The working capital indicates the degree of solvency of the business and the capacity it has to settle its debts in the short term. It can be calculated by subtracting current liabilities from current assets or also by adding net worth and non-current liabilities and then subtracting non-current assets.
This financial and management indicator is very important for entrepreneurial enthusiasts because it allows you to know exactly if you have the capacity to meet short-term financial commitments, using resources that are within reach.
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