SavvyprobookkeepHow have you analyzed the financial and accounting areas of your company? Maintaining good control over these sectors is a great way to maintain the financial health of your institution and allow new successful investments to be made.
In this guide, you will learn about some of a company’s main financial and accounting indicators, as well as understand why you should analyze these metrics frequently. Good reading!
Reasons for analyzing indicators
Every company needs to deal with competition, learn to stand out in the market and win more and more customers. To do this, it is necessary to carry out constant analyzes at different points to understand what needs to be changed or adapted.
This is where financial and accounting indicators come in, as they allow, through real and updated data, to analyze the company’s performance in general or in specific areas. This allows you to make significant changes so that the company remains prominent in the market and in line with the trends of its audience.
Many managers end up neglecting this step, as they are too busy carrying out different tasks. However, it is important to remember that it is the accounting and financial indicators that will guide your activities, as they will show what makes the most sense in that situation.
Capital structure indicators
Capital structure indicators are metrics to monitor whether your invested money is yielding the expected results, in addition to helping to evaluate the company’s current financial situation. They are made up of a set of data that shows how the business deals with its debts.
With the financial and accounting indicators of the capital structure, it is possible to analyze the real size of the deficit, in addition to finding out whether the institution is able to pay it. To structure this index, it is necessary to obtain data on long- and short-term debts, in addition to the current shareholders’ equity. With them, you will be able to work on two important calculations to better understand your debts.
The first indicator is total debt/equity, which reveals the amount invested in the company by shareholders and the amount of debt it has. A very high number in this indicator means that the company is not obtaining financing or generating cash, as a large part of the amount received is used to pay debts and interest.
The second indicator is the interest coverage ratio, which shows the business’s ability to pay the taxes added to its debt without compromising its financial health. To calculate it, divide the EBIT (earnings before interest and taxes ) by the gross financial expenses.
Share of equity
Equity is the division of all the assets that the company has by what it owes to third parties. It also serves as an example for evaluating a company’s financial health. If a company has more debt than equity, in addition to not attracting the attention and trust of investors, it will have a value well below the market if the institution is sold.
There is also the situation in which equity is zero, that is, the sale of all assets would pay the debts, however, there would be no profit left. Finally, there is the ideal equity situation, in which the company would not be in debt if it sold all of its equity. The calculation of equity is very simple, just needing to divide the value of net equity by total liabilities, which is the set of all your debts or business expenses.
Third-party capital participation
Third-party capital are external amounts used by companies to finance their activities, as is the case with bank financing . It is quite different from equity capital, as it is entirely offered by shareholders. It is advantageous to use third-party capital when the money paid for this capital is less than the profit acquired by its investment. Otherwise, the company will suffer losses, as debt will be created.
To find out how much third-party capital participation there is in the company, add the current liabilities (obligations that need to be paid during the year) with the long-term liabilities (debts that will be settled at the end of the following financial year).
Degree of indebtedness or general indebtedness
To find out your company’s general debt ratio, add up the short- and long-term liabilities, and then divide the value obtained by the company’s total assets. This ratio is used to identify the extent to which the company’s assets are financed with the third-party capital, committed to debt settlement.
Profitability indicators
Accounting and financial profitability indicators show how much the investments made by the company have yielded. In other words, how much profit is obtained. These are the main financial and accounting indicators for partners and investors, as they are the way to know whether the time and money invested in the institution are paying off.
Furthermore, it is possible to deal with different profit concepts and, thus, have a more detailed analysis of this index and create a business or cost reduction plan .
Asset turnover
Asset turnover is the direct relationship between sales volume and the money invested in the business. It is considered a profit margin indicator , showing the money made through net sales.
Within the asset turnover it is still possible to calculate the gross profit margin, which shows how the company is able to absorb prices and how revenues absorb operating expenses, as well as production performance in cost control. Another function of the gross profit margin is to indicate the impact of the cost of goods sold on profit.
The operating margin concerns the relationship between operating profit and net sales, in addition to exemplifying the impact of expenses and operating costs on the company’s performance in its activity in the operational area.
To calculate asset turnover, you simply need to divide net income by average total assets. To find net revenue, you need to add up everything the company sold during the year, minus charges and deductions on sales. The average total is found by taking the annual average of the company’s total assets.
Asset profitability
Asset profitability is a great way to evaluate the company’s earnings over time. This index shows the efficiency of assets and their profit rate. The higher your number, the better off the institution is. Furthermore, it is possible to increase revenue, reduce expenses and costs and make investments more safely, as you will have in your hands how much you will earn from your decision-making.
To calculate it, you need to divide the annual active profit by the total assets (at the end of the year). Then, multiply the result obtained by 100. However, do not try to base your actions solely on a single asset: it is necessary to evaluate a series of factors and data to analyze how your business is doing.
Cash and availability indicators
For a company to be successful, it is necessary to have control of its cash, that is, to know about everything that enters and leaves the institution. Furthermore, it is necessary to constantly evaluate the financial and accounting indicators in this area, to check whether the cash flow is as expected or what changes should be made.
Good cash flow allows you to identify unnecessary expenses within the company. Once identified, you can cut them or enlist the help of the team to save money. Another point that highlights the importance of cash flow is having better financial planning for your business, as you will know exactly what you spend, and can then make investments or test new strategies in the company with greater security.
Results flow
The first of the accounting and financial indicators of cash and availability is the results flow, which shows how the company’s results work, as well as its costs and expenses. Its calculation is quite simple. To find the operating cash flow, you need to add the EBIT (earnings before interest and income taxes) with the devaluation and then subtract taxes from the EBIT.
There is an alternative to finding this index by consulting the company’s annual report. If your cash flow is positive, it means that more resources come in than go out, while a negative flow shows that your institution has more expenses than profits.
Contribution margin
Contribution margin, which can also be known as gross profit, shows how much profit made from the sale of each product will help the company cover all its expenses, in addition to generating profit. This index is a way of knowing how much you will need to sell for your company to prosper financially. It is important to know how to differentiate costs from expenses, otherwise the calculation will not be 100% accurate.
To calculate the contribution margin metric, it is necessary to reduce the value of sales by the result of the sum of variable costs. Try to redo this calculation periodically, so that you can analyze the results obtained.
Profitability
The profitability index shows the profit of a company in relation to its activity carried out. The profitability of a business is very important, as having a high number means that the company can pay its expenses and still generate a profit.
Some people tend to get confused with the profitability metric, however, it serves to measure the financial return that a certain investment brings to your business. Keep in mind that a company can be profitable without being profitable, while a profitable institution can be unprofitable.
To calculate your company’s profitability, you need to divide the net profit and gross revenue, and then multiply the result by 100. Net profit is found after subtracting expenses and costs, while gross revenue is the total value of sales .
Balance point
The break-even point occurs when the value of total revenues is equal to total costs and expenses, that is, there is no profit or loss. If an institution only buys and sells products and has no other type of expenditure, when the difference in the purchase and sale value is equal to zero, the break-even point has been reached.
The main use of this metric is to know the minimum amount you need to earn to start making a profit. There is also the financial and accounting breakeven point, which have the same premise as the previous index. To calculate the break-even point, you need to separate your fixed and variable expenses and costs. After that, divide the total variable cost by the total sales revenue. Now, subtract 1 from the previous result. Finally, the result obtained by totaling fixed costs and expenses.
Cash flow
Cash generation is considered one of the best indicators to show the health of the business. When it is positive it means that a company’s net assets are increasing, whereas a negative situation shows that its asset control may be at risk.
It is common for it to be confused with net profit, however, in the second it is necessary to add all accounts receivable to the calculation, which does not happen in cash generation. To calculate this index and know the financial health of your business, it is necessary to reduce the cost of products sold and the administrative and operational expenses of the institution from the total number of net revenue.
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