What financial indicators of a business to track so as not to burn out

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

A profitable company can go bankrupt, and an illiquid company can work successfully.

1. Revenue

Revenue is a direct result of the company's work. This is not the amount of money credited to the account. We are talking about the full amount of claims presented to customers for services rendered or goods shipped. In this case, the funds promised by the contract, but not yet transferred, are also taken into account.

The latter is associated with situations when a seemingly prosperous company goes bankrupt. Let's say the company fulfilled its obligations for 100 thousand rubles, but it will receive the money only in a month. In theory, she has these funds, but in fact she does not. According to the director of market analytics Lilia Fedulina, it is important to be able to manage accounts receivable, that is, the period of granting a commercial loan to its customers, to avoid delays in payments or to effectively solve this problem if it arises.

Lilia Fedulina Director of Market Analytics Podelu.ru

The more money is frozen in accounts receivable, the less goes to the company. Accordingly, the organization has to look for other sources of funding, although on paper everything is in order with the money.

Revenue is influenced not only by the quantity of goods or services sold and their price. It is worth paying attention to the number of buyers and purchases made by one customer, the average check. The more clients, the more diversified the company's risks. The more often customers buy her products, the more successful she is.

Therefore, revenue must be monitored not only as the total amount of goods sold, but also by segment. Each company sets critical marks for itself. But it is obvious that the firm will not be able to work successfully if sales fall, accounts receivable rise and the organization loses its ability to meet its obligations.

2. Profit

This is a key characteristic of the company's performance, which shows the result of activities for the reporting period. Profit shows how much the organization earned after deducting all expenses, and not just received.

It is also important here not only to look at the state of the account, but also to take into account the planned expenses. Let's say the numbers will be very different the day before and after salary and rent payments. But no one will cancel these expenses, so they need to be borne in mind.

Profit must be tracked in dynamics and see what reasons led to its decrease or increase. It is important to analyze its structure: what it is and why.

Lilia Fedulina

If the decline in profits is not due to seasonality, you should sound the alarm and take some measures. The critical point is the absence of net profit. Systematic losses will lead to the "consumption" of equity capital, which will negatively affect the company's solvency and liquidity.

3. Break-even point

It shows under what conditions there will be no profit or loss. This is the amount of revenue required to cover all the costs of the company - both fixed and variable.

The break-even point in monetary terms is calculated by the formula:

The lower the company's fixed costs and the greater the marginal profit (the difference between revenue and variable costs), the more the break-even point tends to zero.

When analyzing, it is worth paying attention to what fixed and variable costs the company bears. What expenses can be optimized or completely eliminated, what is the resulting profit margin? How are prices formed and discounts provided? How does the assortment and quantity of products affect the profit margin? By examining these metrics, you create opportunities to improve your financial position at the same level of sales.

Lilia Fedulina

The critical level for this data is the one at which the company can no longer abandon costs or reduce prices without deteriorating its position.

4. Liquidity

This is the ability of assets to turn into cash in a short time. Here, not only the amounts on the accounts are assessed, but also property, goods - everything that can be quickly sold. This allows you to understand how successfully the company will be able to pay off its debts if something goes wrong, for example, in bankruptcy.

One of the important indicators is the total liquidity ratio, which is calculated as the ratio of current assets to current liabilities.

In general, the situation is critical if the total liquidity ratio is equal to one. In some cases, it is allowed to be below unity, but only for a short period of time. However, a lot here depends on the specific company and the situation. Some organizations can work calmly and be responsible for their obligations with a low overall liquidity ratio.

Lilia Fedulina

5. Working capital

As the name implies, this is money that is in the company's turnover. They cannot be removed painlessly at any second, because the main activities are financed from them. They are very important to the vitality of the organization.

The working capital includes revenue, cash reserves, accounts receivable. However, accounts payable are excluded from this amount. Working capital can be negative or positive. The second option is preferable: in this case, the company lives at its own expense, not borrowed funds.

Distinguish between the operating cycle, which is equal to the turnover period of accounts receivable and inventory, and the credit cycle, which is equal to the turnover period of accounts payable. The difference between the two is the financial, or monetary, cycle. And the shorter it is, the more optimally the company manages working capital.

Lilia Fedulina

6. Cash flow

It demonstrates the movement of company funds, taking into account all income and expenses, and shows the actual difference between income and expenses.

A positive cash flow indicates that the organization is doing well: more funds are received than are needed for the necessary costs. This means that money can be invested in development or, for example, dividends can be paid to shareholders. If, when calculating the difference between all income and all expenses, you get a negative number, it's time to think about what you are doing wrong.

At the same time, cash flow does not indicate whether the company is profitable or unprofitable. Even a profitable company can be threatened with bankruptcy due to the inability to fulfill obligations - we discussed this in detail above.

Cash flow is a planning and financial management tool. Tracking it helps to avoid situations when tomorrow you need to make a payment on a loan, but the accounts are empty, because the money for the goods will come only the day after tomorrow. Cash flow management allows you to correctly distribute expenses and incomes over time so as to avoid cash flow gaps.