Company performance is the result of management activities in any company. The parameter commonly used to assess a company’s performance is an approach that involves taking financial information from financial statements or other financial statements. Financial metrics are important things to consider when running a business.
An entrepreneur needs to understand financial metrics because many benefits can be gained by being able to analyze the company’s financial metrics. Financial metrics serve as a measurement tool to determine a company’s financial condition and performance, which can be used to guide decision-making. Learn how to evaluate a company’s performance using the financial metrics analysis below.
Factors affecting business performance
Several important factors can affect a company’s performance. Among them are the following:
Effectiveness and efficiency
Authority or authority
Discipline or compliance with applicable laws and regulations
Initiative related to thinking and creativity in the company
Ratio analysis function
Liquidity Ratio: The liquidity ratio is a metric that measures a company’s short-term liquidity capability by looking at the company’s working capital relative to its current debt.
Inventory turnover ratio: The inventory turnover ratio measures the activity or liquidity of the company from the point of view of the availability of goods. This ratio shows the efficiency with which the company uses all of its assets to generate revenue.
Activity Ratio: The activity ratio shows you the level of effectiveness in using the company’s assets or assets.
The profitability ratio and profitability (profitability ratio): It is a ratio that shows the level of rewards or profits compared to sales or assets.
Investment Ratio: An investment Ratio is a metric that measures the company’s ability to provide returns or rewards to capital providers, particularly capital market investors, within a given time.
The purpose of KPI analysis in a company:
As a barometer for predicting or forecasting financial conditions in the future.
Review of the current state of the company, and problems in management, operations, and finance.
Measuring instruments for increasing efficiency in all areas of the company
Financial statements as a tool to measure business performance
Financial statements have several advantages and disadvantages that management or the owners of the company will feel, including the following:
Become a tool for measuring or evaluating company performance. With the annual financial statements of the company, all information about the flow of income and expenditure in the company is recorded properly, validly, and transparently. So that financial reports can also be used as a basis for evaluating the performance of business units and employee teams in the company.
Take steps to improve the company. By knowing where the inefficiency of the company lies, corrective steps can be carried out better and in a more targeted manner. With the annual accounts, it becomes clear where the appearance of company items with large expenses or financing need to be saved, and so on.
Become the information basis for future forecasts. Financial data will help management and company owners to determine goals and visions for business development they want to achieve in the future. Especially when buying assets or making loans to other parties that need to be matched to the company’s ability to generate better revenue.
Increase corporate credibility and accountability. For some investors, good financial statements can be the basis for investing in the company. But that doesn’t mean you can polish the financial statements with good positive numbers to value the company higher.
Financial metrics to assess company performance
4 financial metrics indicators can be used to assess the company’s financial performance. These four indicators are interconnected, so business owners need to be able to maintain a balance between the four metrics they have. These indicators include:
The cash Ratio is a metric used to determine the company’s ability to meet its payment obligations and review working capital efficiency. This indicator is used to measure the liquidity of a company. If the company can meet its obligations, the company can be said to be liquid. If the company cannot meet its obligations, the company is considered illiquid. The ratios that are commonly used for calculation are the current ratio, the quick ratio, and the liquidity ratio.
The profitability Ratio is a metric used to show a company’s ability to generate profits. Furthermore, this ratio can also be used to determine the profitability of the company, which can be measured by gross profit margin, net profit margin, return on investments, and return on equity.
The solvency ratio is the metric used to evaluate the company’s ability to pay all of its obligations in both the short and long term. This ratio can be measured by the debt-to-asset ratio, interest time earned, and fixed cost recovery.
The activity ratio is used to measure the level of utilization of assets or company assets. This ratio is measured by accounts receivable turnover, inventory turnover, fixed asset turnover, and total asset turnover.
Financial ratio analysis function
Financial metrics analysis is used by company management to determine how well the company is performing. While the function of financial ratio analysis for investors is to see the company that is used for investments and whether it is in good financial shape or not.
So that investors can decide which investment is the best. A company can be said to be in good shape if it has indicators such as a smooth liquidity ratio, high profitability, high solvency, and a high activity ratio. These indicators can be identified using financial ratios that can be calculated based on data from financial statements.
To perform a financial ratio analysis, every company must have accurate financial reports. Financial metrics allow the management team and company owners to assess the company’s performance and help investors make investment decisions. A properly and correctly conducted performance appraisal of a company affects the company’s success.