This is the time of the year when most companies issue their annual financial statements. In light of gathering insight on what financial metrics companies use, I decided to glean through the annual reports I received. The pages and pages of financial results and ratios are fairly similar across businesses. However, the operational financial metrics are more interesting. Regardless, there are 4 reasons why financial metrics are useful. They provide important insight.
- Bottom-line for the business—This is important for every organization, both for profit and non-profit. Was there sufficient revenue to cover the expenditures for the year? A surplus provides the buffer for reinvestment and new expenditures. A deficit could lead to some bell tightening. Sample metrics are operating margin and net income.
- Ability to generate revenue—No business could survive without revenue. Information on revenue sources provides insight on how successful the company is in the market sector. By comparing the revenue with the level of resources committed, you can gauge the value of effort invested in specific business activity. Similarly, you can use revenue generated per unit of output to assess the potential of that opportunity. Sample metrics are total revenue, revenue per employee, and average revenue per customer.
- Cost of activity—Running a business requires resources. It is good to know what the necessary expenses are to perform certain work. The nature of the expenses varies with the business but the relative size of the expenditure helps to understand the cost drivers. A company which has a good handle on its costs normally attains a healthy bottom-line. Sample metrics are cost of manufacturing, research and development expense, and unit cost.
- Perspective on value—Assets are used to produce goods and services. Soft assets such as brand are an important lever a business would use to build market presence and a loyal following. The financial representation of different things provides a sense of worth and a way to compare using the same denomination. Sample metrics are land value and the value of patents a business holds.
Financial metrics are useful for certain purposes. They are generally easy to obtain and compile. The challenge is to present the data in a way that is meaningful and insightful. Consider the above uses and determine what the best way is to provide the missing information for decision making.
© Connie Siu 2014. All rights reserved.