Financial metrics have been around for ages. However, a large number of companies make business decisions without considering them all. If a company ignores these financial indicators by only relying on intuition to evaluate its operations in the short or long term, it may be preventing them from achieving greater success.
Financial metrics are essential when it comes to examining and understanding the situation in which the company finds itself in to create new strategies to grow and stabilize the business.
What Are Financial Metrics?
Financial metrics are quantitative evaluation indicators that provide information on the real value and profitability of a company. Principally, they serve as reference points to know if the operations are going in the right direction, in addition to the cost of carrying them out. Thanks to financial metrics, a plan for the future can be established to avoid mistakes when it comes to decision-making, since the data obtained can perform prognoses, see when the best time is to invest, understanding how resources are being spent, or to know what is preventing the company from reaching its full potential.
Types of Financial Metrics
It is very important to know if your business is performing correctly, which implies analyzing the different types of existing metrics to be able to evaluate the company’s profitability properly.
The Cash Flow
Cash flow helps evaluating the net inflows and outflows of cash occurring in a given period of time. This financial metric does not include sales or accounts receivable, but only takes into account payments already received.
Thus, a company will be able to have the necessary information about the ability of a business decision to generate cash.
Through the calculation of this financial metric, both positive and negative results are possible. If it is positive, it means that the enterprise can make investments or return capital to shareholders. On the other hand, if a negative result is obtained, it means that the company is spending more than it earns.
The Gross Margin
This metric refers to the benefit obtained directly from a product or service. Its value is calculated by subtracting production costs from the selling price of an item or service, with the result expressed as a percentage.
It should be kept in mind that, if the result is negative, it means that the expenses are practically impossible to cover, but it should not be forgotten that it does not represent the total real profit.
Net Margin
In this financial metric, indirect fixed costs are included, in addition to production costs. Then, the costs derived from the company’s operations (logistics, marketing, commercialization…) and the total production costs would be added.
Unlike the gross margin, this result, also expressed as a percentage, is more accurate as well as more realistic and will help to better understand the profitability of the business.
Accounts Receivable
As the name suggests, this financial metric is part of assets and refers to the total money owed to the company by customers, suppliers or other businesses. Payment dates depend on each organization and can be short, medium or long term, but the due dates of the invoices must be carefully observed in order to establish the correct deadlines.
Customer Retention Rate
One of the most important aspects that a company must bear in mind is the loyalty of its customers, since acquiring new ones is more difficult than keeping them.
With the customer retention rate, it is possible to know the percentage of customers that were successfully convinced to maintain a commercial relationship for a given period of time. The formula for this financial metric consists of subtracting the number of final customers in the business cycle minus the number of new customers, divided by the number of initial customers and multiplied by 100 to obtain the result as a percentage.
Productivity per Employee
The productive work of employees contributes to the revenues generated by the company. Therefore, it is necessary to measure labor productivity and its contribution to earnings. The formula for this financial metric changes according to the activity performed by the company, but the following can be obtained as a basis: products or services produced / resources used.
Another example will be targets or hours worked divided by total revenues or between the customer satisfaction index.
Return on Investment
This financial indicator is very common in company business plans, since it is a more specific calculation that shows the benefits obtained by each initiative implemented. Known as ROI (Return on Investment), allows to assess the performance of investment plans, whether in sales, advertising or marketing campaigns.
Its formula consists of subtracting the benefits minus the investment, and dividing the result by the investment, always taking the actual data as the value.
With the results, a company will be able to make its business plans based on tangible results and see whether its investments have been productive or not.
At DocPath, we have calculated the return on investment that a business X obtains after implementing one of our CCM solutions. CLICK here to know the result.
Do you want to know more?
About DocPath
DocPath is a leading enterprise document software company that offers its international customers the technology that allows them to complement their ERP and implement advanced Document Output Management, Customer Communications Management and document software spooling processes.
Founded in 1993, DocPath is based in Europe, USA and Latin America and is present with its Solutions in companies around the world. Among its customers there are prestigious banks and top-tier corporations, facilitating the difficult and complex task of designing, generating and distributing their business-critical documents. DocPath keeps a strong commitment to R+D+i, an area to which it allocates a large part of its revenues, and in which lies one of the keys to its success.
For more information, visit: www.docpath.com.
Legal Notice: DocPath is a registered trademark of DocPath Document Solutions. All rights reserved. Other trademarks mentioned herein might be the property of their respective owners.