7 financial indicators to track to keep your business in good health
Financial indicators are financial data used to steer your company, to assess its financial health and development capacity, and to detect malfunctions in good time.
But what are these financial indicators or ratios, and how do you calculate them?
Here's a list of 7 financial performance and profitability indicators to keep a close eye on.
All you need to know about financial indicators
Financial indicators: definition
A financial indicator, or KPI, is data taken from :
- either the balance sheet,
- or the income statement.
By analyzing a set of indicators, we can diagnose the company's financial situation at a given moment in time, and assess :
- its financial equilibrium,
- profitability
- financial independence.
Financial indicators are therefore important information
- as part of a company takeover ;
- to manage financial resources optimally;
- to anticipate and control potential financial risks;
- to consider investments or, on the contrary, budget restrictions.
What are the main types of financial indicators?
Financial indicators fall into several categories, depending on the aspects of performance they measure.
Productivity performance indicators
These indicators measure the efficiency with which a company uses its resources to generate revenue. 👛
They include metrics such as sales per employee or output per hour worked.
✅ For example:
- sales per employee: this involves dividing total sales by the number of employees to assess individual productivity.
- production per hour worked: this indicator measures the volume of production generated per hour worked, helping to identify the efficiency of production processes.
Quality performance indicators
These indicators assess the quality of the products or services offered by the company.
They include measures such as :
- customer satisfaction,
- product return rate,
- and quality-related costs .
✅ For example:
- customer satisfaction rate: usually measured by surveys, it reflects customers' perception of product or service quality.
💡 Customer satisfaction software can help you address this issue.
- product return rate: this indicator measures the proportion of products returned due to defects or dissatisfaction.
Strategic performance indicators
These indicators help assess the company's performance in relation to its long-term strategic objectives.
They include metrics such as :
- market share,
- sales growth rate,
- and financial performance indicators such as return on investment (ROI).
✅ For example:
- market share: this is the portion of the market a company controls relative to its competitors.
- sales growth rate: this indicator measures the increase in sales over a given period, demonstrating the company's expansion.
Capacity performance indicators
These indicators measure the company's ability to manage its resources and meet demand.
They include measures such as production capacity utilization rate and inventory turnover rate.
✅ For example:
- production capacity utilization rate: this indicator measures the percentage of production capacity actually used in relation to total available capacity.
- inventory turnover rate: this calculates how often inventory is renewed over a given period, reflecting the efficiency of inventory management.
The 7 key financial indicators and how to calculate them
As we've seen, there's a plethora of financial indicators out there, so much so that it's hard to know where to look. 😮💨
We've selected 7 indicators 7 to keep an eye on. Let's zoom in. 🔍
Working capital requirements (WCR)
Working capital is the amount of money a company needs to :
- overcome any short-term cash flow problems;
- make expenditures while awaiting cash receipts.
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▷ Calculation of WCR = (average inventory + accounts receivable) - accounts payable |
Global net working capital (GNWC)
Overall net working capital is the cash reserve needed to meet working capital requirements.
It is the cash surplus after financing :
- stable jobs (fixed assets),
- investments by stable resources (permanent capital and long-term financial debt).
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▷ Calculation of FRNG = stable resources - stable uses |
Net cash position (NC)
Net cash is cash available at a given moment, i.e. cash on hand. It reflects the company's short-term financial equilibrium.
It is therefore the difference between cash at bank and bank debts.
But it can also be calculated using the 2 previous indicators:
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▷ TN calculation = NFFR - WCR |
Break-even point (SR)
The break-even point is the amount of sales a company needs to generate to cover all its fixed and variable costs and become profitable.
It is used to estimate the company's viability and reassure investors.
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▷ S R calculation = fixed costs/((sales - variable costs)/sales) |
Sales margin
The sales margin is the profit generated by commercial enterprises, i.e. the difference between the selling price and the purchase price of goods or services.
It is used not only to estimate profits, but also to guide sales strategy, in particular pricing.
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▷ Calculation of total sales margin = Sales excluding VAT - Purchases excluding VAT |
Gross operating profit (EBITDA)
Gross operating surplus corresponds to :
- the operating resources generated by the company's main activity,
- after payment of social security contributions,
- before depreciation and amortization.
EBITDA is therefore the company's economic result, excluding depreciation, financial management and exceptional operations.
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▷ EBITDA calculation = gross margin + operating subsidies - taxes - payroll costs |
It can also be used to calculate :
- return on capital (EBITDA/invested capital),
- cost control (EBITDA/sales).
Cash flow (CAF)
Cash flow is the monetary surplus generated by a company's activities.
It is the sum of net income and "non-cash expenses", including :
- depreciation and amortization,
- provisions for liabilities and charges.
The above calculation is based on the income statement or EBITDA.
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▷ Cash flow = EBITDA + cash income - cash expenses |
Cash flow can contribute to investments or working capital, for example.
What about intermediate management balances (IMB)?
Intermediate management balances represent a number of financial indicators that help us understand how a company's earnings are constructed.
These include :
- sales margin,
- gross operating profit ;
but there are also :
- value added,
- operating income,
- financial income,
- current income before tax,
- extraordinary income,
- net income.
What are the indicators of financial equilibrium?
Current ratio
The current ratio measures the company's ability to cover its short-term debts with its short-term assets.
💡 A ratio greater than 1 is favorable.
Immediate liquidity ratio
The immediate liquidity ratio excludes inventories from short-term assets, focusing on cash and receivables.
Debt-to-equity ratio
The gearing ratio compares total debt to equity to assess the level of financial risk.
👉 Other indicators of financial equilibrium include:
- net working capital,
- net cash flow,
- and self-financing capacity, mentioned earlier.
How to monitor financial indicators
Presented in the form of a dashboard, you can study your financial indicators :
- temporal, to observe the evolution of figures over one period in relation to another ;
- comparative, to see how results compare with those of competitors, for example.
You can automate the collection of all the financial indicators on the dashboard using appropriate accounting software.
Business intelligence tools can also support you in this task. MyReport, for example, saves CFOs precious time in analyzing and controlling company financial data, by automatically generating reports and dashboards.
Our advice: think about combining financial and non-financial indicators to get an overall picture and a long-term vision, such as the rate of turnover or new customers.
And above all, limit the number of indicators to 10, for optimum readability and responsiveness.
Is there a more important KPI?
Cost per acquisition (CPA) is often considered the most crucial KPI for many companies, particularly those focused on marketing and customer growth.
👉 CPA measures the average cost spent to acquire a new customer, offering a clear view of the effectiveness of marketing campaigns and the profitability of advertising investments.
Other companies, on the other hand, consider ROI to be the most important indicator.
In this sense, the most important KPI depends on what you're trying to achieve and the data you need to reach your goals. ☝️
Financial indicators in a nutshell
As you'll have gathered, there are a plethora of financial indicators, but they're not to be taken lightly!
They highlight what's working and what's not in your business, as they are a sign of good financial health.
We hope this comprehensive guide will help you navigate your way through them. If their number seems daunting, just concentrate on the ones we've highlighted.
Headache-free success guaranteed!