Key Financial Metrics Every Business Accountant Tracks for Success

Business accountants are very important in the financial performance of a company as they help in identifying the performance of the business and the areas that need to be addressed.

Another important aspect of this position is monitoring of the most important financial indicators.

These metrics are used in the management of business as tools for determining the financial health of the business, the future prospect of the business and decision making.

Below are the important financial ratios that every business accountants monitor for performance.

1. Revenue Growth

Revenue growth is one of the most important factors that define how much a company can sell its products or services in a certain period of time.

It is used in determining the performance of a business as to whether it is growing or shrinking.

Accounting also measures the YoY revenue growth and QoQ revenue growth in order to understand the changes that are taking place.

Why It’s Important: Thus, year on year revenue growth is an important measure that shows that the business is in good health and expanding.

This means that if the revenue growth is slow or negative, then it may be an indication of certain challenges that require attention such as the state of the market, customer loyalty or issues to do with pricing.

How to Track It:

[ (Current Period Revenue – Previous Period Revenue) / Previous Period Revenue]

This formula will lead you to revenue growth rate which is usually given in percentage.

 2. Net Profit Margin

Net profit margin shows how much of every dollar earned by the company is kept by the company after all the costs have been paid for.

This metric is quite useful when it comes to gauging how good a given company is when it comes to the conversion of revenue to actual profit.

Why It’s Important: This is because a high net profit margin is an indication that a company is well placed to manage costs and convert sales into profit.

On the other hand a low net profit margin may show signs of inefficiency, or high costs.

How to Track It:

=[ (Net Income / Revenue) x 100 ]

The outcome of the assessment is also given in percentage form. For instance, if a company has a net profit margin of 20%, that means that for every dollar of sale made by the company, it retains 20 cents as its profit.

3. Cash Flow

Cash flow means the actual money going in and out of a business and the net amount of money flowing in or out of the business.

Higher cash flow is beneficial for a company in terms of liquidity position while the negative cash flow is not good even if the company is making profits.

Why It’s Important: This means that businesses are in a position to expand, repay their loans and survive during the negative financial periods.

Accountants track operating cash flow which is the cash from the company’s routine operations, investing cash flow that is the cash from investment in assets or disposing of assets and financing cash flow which is the cash from external sources or used in external sources such as borrowings or issuance of stocks.

How to Track It:

The cash flow statements are prepared in such a way that cash is divided into operating, investing, and financing activities to help the business accountants to identify sources and uses of cash over a specific period.

4. Gross Profit Margin

The gross profit margin on the other hand is calculated by dividing the gross profit by the total revenue. Gross profit is derived from the subtracting the cost of goods sold from the revenues.

This metric will help in measuring the effectiveness of a company in its production or delivery of products or services.

Why It’s Important: Gross profit margin is more useful in determining the amount of profit that is made from the core business activities before other general expenses are taken into consideration such as administration and marketing expenses.

Low gross profit margin may also suggest increase in cost of production or the cost of goods sold, or price changes.

How to Track It:

As for the Gross profit Margin: it is calculated as (Revenue – Cost of Goods Sold) / Revenue x 100

This will give the gross profit margin in percentage.

5. Current Ratio

The current ratio is one of the liquidity ratios that determine a company’s capability of meeting its current liabilities using current assets.

It is desirable to have a ratio greater than one as it shows that the company’s liabilities are less than its assets.

Why It’s Important: This ratio, current ratio, is very useful in determining the extent of a business’s ability to meet its short-term debts that are crucial in running the business in a normal way without having problems of insufficient cash in the business.

How to Track It:

[ Current Assets / CurrentLiabilities ]

A ratio of 1.5 or higher is considered healthy, while a ratio below 1 may indicate potential liquidity problems.

6. Return on Investment (ROI)

ROI is a financial ratio which is used to determine the efficiency of an investment or a business venture in terms of profit.

This is a critical measure in assessing the performance of different business activities that include marketing strategies, new investments or projects.

Why It’s Important: A high ROI is an indicator that a company is generating high returns from the investments it has made while a low ROI may point to the fact that a business needs to reconsider how it is spending its resources.

How to Track It:

[ Net Profit / Cost of Investment x 100]

This formula provides the ROI in percentage form which assists companies to determine the profitability of their investments.

7. Debt-to-Equity Ratio

The Debt/Equity ratio is another financial ratio which is used to determine the degree of financial leverage of a firm by comparing total liabilities with stockholders’ equity.

A lower ratio is generally favorable since it means that the company does not have to dependent much on debt to support its operations.

Why It’s Important: High debt equity ratio may mean that the company is too much in debt and is in a vulnerable position if there is any economic instability or if the interest rates are raised.

How to Track It:

(Total Liabilities / Shareholders’ Equity)

A firm’s debt to equity ratio of less than one is regarded to be safe while higher ratios may be risky.

Conclusion

It is important therefore to track these key financial metrics in order to be able to pass information to the business accountants regarding the financial health and performance of the company.

It is therefore important that these indicators are continually checked to help in decision making, management of business activities and guaranteeing the sustainability of the business.

These metrics are therefore very useful to any company whether it wants to expand its business or just sustain the current position.