Are you tracking all the financial indicators needed to measure your business performance?
Check out the most important ones below.
1. Billing
Revenue is the most important financial metric that would give an estimate of the finances of the company.
Revenue is the total sum of money generated from the sale of goods and/or services within a specific time, monthly or annually.
In other words, it is all the revenues that ought to come into the cash register of the company as a result of its commercial activity, either in selling goods or services, presuming consumers are paying.
Important: if paid in cash, the amount is credited to your cash register immediately after receipt; if paid partially, only credited when each portion is paid.
Revenue is used to assess sales performance and understand whether the company is managing to generate enough cash to cover its costs and make a profit.
Furthermore, it serves as a calculation basis for determining the taxes that the company must pay to the government, depending on its legal nature and tax regime.
There are two types of revenue that can be calculated in your company: gross and net.
To calculate gross revenue , simply multiply the sales price of the product or service by the total number of units sold in the chosen period, following the formula below:
Gross revenue = Sales price x Quantity sold
Net revenue is equal to gross revenue minus sales deductions (returned products and cancelled purchases) and taxes charged on each transaction, following the formula below:
Net sales = Gross sales – Sales deductions – Taxes
2. Gross profit
Profit is what every entrepreneur seeks when opening a company , which can be measured in its gross or net form.
Gross profit is the company’s total revenue minus direct and indirect costs associated with the production of goods or services , according to the formula:
Gross profit = Total revenue – Production-related costs
In this case, production-related costs are the variable expenses necessary to produce a product or perform a service, including labor (in some situations), inputs and raw materials — the higher the sales volume, the higher these costs will be.
If you have direct labor hired, its cost will occur independently of production, characterizing it as practically a fixed cost. If labor is hired on demand, it will be variable.
Once gross profit (revenue – costs related to production) has been calculated, we need to deduct expenses which can be fixed or variable.
That’s where net profit comes in , which shows how much money is actually left for partners and shareholders after subtracting all possible expenses from revenue.
3. Break even point
The break-even point indicates the moment when the company’s net revenue is exactly equal to the sum of costs and expenses , that is, net profit equal to zero.
It is used to calculate how much the company needs to sell to fund its operations without any losses.
Obviously, reaching the break-even point is not a goal for any company, as it only serves as a reference to find out when the business will start to make a profit.
To calculate this indicator, simply use the following formula:
Breakeven point = Fixed costs and expenses ÷ Contribution margin
In this case, the contribution margin is the revenue that remains for the company after paying the production cost and taxes on products and services, as we will see in more detail below.
4. Profit margin
The profit margin is the percentage that the entrepreneur adds to the total costs of a product or service, defining how much he intends to profit from each sale.
It is essential in pricing, as it ensures that the product’s value will cover costs and will be within the average practiced in the segment.
5. Contribution margin (gross margin)
The contribution margin is the same as gross profit on sales , that is, what is left for the company after paying the production cost and taxes on products and services (the so-called variable expenses).
This remaining money is used to pay the company’s fixed expenses (rent, payroll, maintenance, etc.) and constitute the business’s profit for partners and shareholders.
Therefore, the contribution margin is a fundamental indicator for evaluating financial performance, as it shows whether revenue is sufficient to pay costs and fixed expenses and still make a profit.
This is the formula used to calculate this indicator:
Contribution margin = Revenue – (Production-related costs + Production-related expenses)
The result of the account represents how much the company is able to generate in resources to pay fixed expenses and make a profit.
6. Current liquidity
Current liquidity is an indicator that reveals the company’s ability to meet its short-term obligations.
To calculate this KPI, we need to take into account two concepts:
- Current assets: are all assets or rights of a company that can be easily transformed into money, such as the current account balance and inventory.
- Current liabilities: all of the company’s debts that need to be paid within one year, such as accounts payable and taxes.
That means the company has adequate short-term capital to pay for the bills.
If it is at par 1, that means capital and liabilities are balanced; however, if it is below 1, then that indicates a scenario wherein less capital is available to compensate for all liabilities.
There are other types, such as dry liquidity indicators, who do not consider inventory stock a current asset and immediate liquidity which ignores inventory stock and accounts receivable.
7. EBITDA
EBITDA shows the potential of how much resources it generates without considering any kind of financial discount and taxes into its account.
Hence, it sums up the cash generation potential of business, helpful to assess the competitiveness and efficiency of management.
To calculate this indicator, just use the formula:
EBITDA = Operating profit + depreciation + amortization
In this case, operating profit is that generated by the operation of the business, minus administrative, commercial and operational expenses (Operating profit = gross profit – [operational expenses + operational revenue]). Financial expenses and revenues should not be considered as operational for the purposes of calculating EBITDA.
It is the gradual reduction in the value of physical assets due to wear and tear or loss of usefulness over time. Amortization represents a loss in intangible assets, such as brands and patents.
All this information can be obtained from the company’s Management Income Statement , which already shows the results before and after taxes, depreciation and amortization.
8. Profitability
Profitability indicates how much a business actually earned in relation to everything it received.
This is because, when a company sells a product or service, the price charged is not entirely allocated to the business, as there are costs with labor, structure, manufacturing or purchasing.
Therefore, profitability serves to understand the relationship between the value of net profit and the value of sales, as a percentage.
Formula:
Profitability = Net profit / Net revenue x 100
The resulting percentage can be used to assess the company’s ability to generate profit for partners and shareholders, as well as serving as a parameter for comparisons with the competition .
9. Profitability
It is common to confuse profitability and profitability, as they are very similar financial indicators.
However, while profitability represents what the company earned in relation to everything it received, profitability compares its earnings to the investments made in the business.
Therefore, the second shows how much the company is capable of generating return from the capital invested in certain assets, using the following formula:
Profitability = Net profit / Investment x 100
Here, investment is not the share capital invested in the company, but rather the investment made in machinery, equipment and other assets that are linked to production.
10. ROI
Return on Investment (ROI) is a metric used to identify how much a company earns in financial returns from any investment made.
It is through this that the company discovers what profit (or loss) was gained to cover the costs of applying the resources and to still have a financial return, if it does.
The formula is one of the best known in the corporate world:
ROI = (Gain Obtained – Value of Investment) / Value of Investment x 100
With this calculation, you are able to measure the return from investments in products, services, campaigns, training, or any other activity of the company.
Furthermore, ROI is an important parameter to compare your return with that of other companies in the same segment.
11. Average ticket
The average ticket is a financial indicator related to the commercial area that shows how much you are billing per customer .
Its formula couldn’t be simpler:
Average ticket = Total revenue / Number of sales in the period
It is also possible to calculate the average ticket for a given product, service or category , depending on the company’s needs.
In general, this indicator is very useful for planning the business’s sales and understanding whether it is more advantageous to increase spending per customer or attract new customers, for example.
12. Inventory turnover
Stock turnover or inventory turnover is an indicator that reveals the speed at which inventory was renewed in a given period or what is the average time a product remains before being sold.
To do the calculation, simply apply the formula:
Inventory turnover = Quantity of products sold / Total products in stock
It will be less than 1 if the result is showing that at the end of the period, there are unsold products left in the inventory. It will be greater than 1, which means all items have been renewed at least once in the period evaluated.
It is one of the main instruments for measuring and evaluating inventory management, which can be assessed at different intervals, although annual analysis is more frequent.