Key figures are used to evaluate a company and its operations. The key figures are great importance in the annual report and report on how things have gone for the company during the past year. Analyzing key figures for the company can be a good way to compare current results against the previous ones to see if the company is on the right track. It can also give you information if something needs attention and reviewed to improve results.
Banks and investors in the company may also be interested in taking part of the key figures in order to gain a better understanding of the company’s financial position. In the following blog posts, we take a closer look at some of the most common key performance indicators and how key performance indicators analysis can help your business.
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Depending on the size and goals of the company, different key figures are usually looked at. In smaller companies where you manage your accounting according to the K2 regulations, you usually look more closely at a fewer number of key figures compared to a larger company. The key figures you look at can also be specific to the industry you are active in. Normally, key ratios are divided into financial measures, operational measures and profitability measures. Let’s start by taking a closer look at financial measures and the most common key ratios.
Financial key ratios report the company’s financial position. Some common financial ratios are equity asset ratios, cash liquidity and interest coverage.
Solidity:Shows the company’s long-term ability to pay and can show how much of the company’s assets are financed by equity. It is often said that companies financed with a lot of equity have a good solidity ratio and have less risk than a low solidity company that is financed with little or no equity.
Cash liquidity: Shows the company’s short-term solvency That is, if the company manages to pay off all its short term debts. İt is often said that cash liquidity should be at least 100% or preferably more so that you can manage to pay your short term debts.
Interest coverage ratio: It shows how much the company can lose in profit without affecting the interest payments. That is, if the company manages to generate enough surplus to cover all its financial costs.
This category focuses on financial information relating to personnel and the company’s capital. Examples of key performance indicators included in business measures are turnover per employee and capital turnover rate.
Turnover per employee: Explains net sales by the number of employees and evaluates the efficiency of the company. If the value of turnover per employee is high, the company is considered more efficient. In order to influence and get a higher value of turnover per employee, you need to increase turnover and/or reduce the number of employees.
Capital turnover rate: Shows how efficiently an entity uses its capital in relation to its turnover. The higher a company’s capital turnover ratio, the less the capital of the company depends. Capital turnover rate can be used to make comparisons with other companies in the same industry or own comparison with previous years to look at the development of the company.
Profitability metrics, as it sounds, are one way to explain how profitable a company is. The highest aim of a limited company is to be fully profitable and therefore keeping an eye on these key figures is essential. We will go through profit margin, return on investment and return on total and equity.
Profit margin:Explains how much profit you get for each turnover crown . That is, the profit before tax. The company’s profit margin doesn’t take into account how successful the company because it doesn’t include anything about how the company finances its business. Therefore, profit margins are most often used to analyze competitors and the company’s profits in an entire market.
Profitability: Describes the company’s profit in relation to invested capital in the company and is expressed in %. The lower return on investment % the company has, the more profit and higher returns for shareholders. Return on investment can be calculated in two different ways, equity or total capital, depending on whether you want to look at your invested equity or the company’s total capital.
Return on total capital: Return on total capital is the most central measure of profitability and describes the profitability of the company’s total capital. The return on total capital ratio gives you a picture of how efficiently the company uses its assets to generate as much profit as possible. The higher return on the company, the better it is to use the company’s assets effectively.
Return on equity: Return on equity measures the return on assets that shareholders invest in the company. This key ratio can be useful for investors as it tells you how profitable the company is for its shareholders and whether you should invest in shares. It is also a good key figure to look at when comparing different companies in the same industry. The higher return on equity, the more profitable the company.
Now we have a clear picture of some of the most common key figures we look at to get an overview of the company’s financial position. Let’s move on to key performance indicators analysis. By doing a key performance indicator analysis, you will gain a better understanding of what the figures in the income statement and balance sheet show. By continuously following the figures, you can get a better understanding of how the company is doing and see opportunities to develop. Key performance indicators analysis is a good means for you as an entrepreneur to be able to help your company move forward and can form the basis for many of the decisions that need to be made in the company.
What key figures to focus on, as already mentioned, depends on how large the company is and in what sector the company operates. So when you do your key performance indicators analysis, it’s important to start by choosing the key performance indicators that reflect your company and the industry you’re in. The next step is to keep an eye on the competition. By doing a competitor analysis, you get a better understanding of how other companies are performing and you can use these numbers to bring context to your own numbers. But don’t forget that every business is different and works in different ways. Therefore, your numbers can be very different from that of one competitor, which does not mean that one company is better than the other.
After developing what important figures are important to your company and doing a competitor analysis, it’s time to develop a strategy By formulating a strategy based on the company’s financial position and key performance indicators, you can work better to develop the company going forward. It will help you determine which opportunities to go to and which to turn down.
If you want to learn more about important key figures or talk to a consultant about which important names are most important to your company, you can contact us. Samson’s Accounting Firm always works to develop the best solutions for your business needs.