In a business, inflow and outflow are the most important factors. It is better to clarify what inflow and outflow mean in any business. Inflow is the revenue in any business. It can be calculated on a monthly as well as on a yearly basis. Every company has its own set of standards. So, based on those standards, they decide if they have to calculate the revenue for a month or year. In simple words, you can make revenue as a profit in a business.
On the other hand, the outflow is the cost that is disbursed. Every company works on some kind of product. Through its products, the company makes revenue. For the payment and supplies of such products, the company has to spend money. This money is called cost or outflow. These factors play major role in financial performance measures.
This article aims to discuss about top financial performance measures.
What are Financial Performance Measures?
Financial performance measures are the metrics that are used to detect the overall management of money in any kind of business. It includes all of the activities, including inflow and outflow of money.
So, the financial performance measures are used to collect the relevant information. The collected information helps in tracking the working system of a company. The presence of financial performance measures makes it easy to deal with stakeholders. It helps in evaluatingthe current and future worth of a company. In this way, you can increase the investor rate for your company. Other than external dealings, financial performance measures help in a good internal management system of a company. It includes financial stability for the company and future goals. If you are still facing any issues, you can hire accounting dissertation writing service from reliable companies like Cheap Essay Writing UK.
Top 7 Financial Measures to Identify Company’s Performance
There are some metrics that are considered as the most important one in all organisations. So, the managers of organisations ensure implementation of financial metrics. These financial performance measures are listed below:
- Gross Profit Margin
- Net Profit Margin
- Debt-To-Equity Ratio
- Total Asset Turnover
- Operating Cash Flow
- Inventory Turnover
Let’s discuss each financial measure briefly.
Gross Profit Margin
Gross profit margin is the most frequently used metric in a company. It is the profit rate that includes additional expenses. The operating and interest costs are considered as additional costs. Also, it covers taxes applied on each product. In these metrics, you have to work on the direct cost of products. In simple words, you can take it as profit for a company. You must have a clear understanding that the gross profit margin is different from the net profit margin. The terms, formulae and purpose of both metrics are different. The formula of gross profit margin is mentioned as follows,
Gross profit margin = (net sales – COGS) / net sales
Here, COGS is the cost of goods sold.
Net Profit Margin
In gross profit margin, you are supposed to minus the tax, interest and operating cost. On the other hand net profit margin does not include these costs. In this metric, the percentage of revenue is calculated to see the good financial performance. The formula of net profit margin is mentioned as follows;
Net profit margin = (net profit / revenue) x 100
The value obtained from this formula is in the form of a percentage.
You may have heard about the equity multiplier. This equity multiplier is the same as leverage. From the list of important financial performance measures, this measure is used to deal with debt. Many organisations buy their products or assets by using debt. The proper use of debt can be beneficial, but its excessive use causes serious troubles. The relation between debt and risk to business is direct. When your company’s debt increases, the company’s asset also increases. On the other hand, the company’s equity decreases with indirect relation. Ultimately, the risk of business increases, which is not a good thing.
The formula of leverage is given below:
Leverage = total assets / total equity
Another financial performance measure is the debt-to-equity ratio. The use of debt-to-equity is ensured to know, if the company is using more debt or more equity. With the help of these metrics, you can evaluate the leverage of any company. The more value of debt-to-equity ratio refers to more risk. Similarly, more leverage refers to more risk. This ratio is represented as,
Debt to equity ratio = total debt / total equity
Total Asset Turnover
It is a ratio that is used to evaluate the better performance of a company by direct means. The high rate of turnover refers to the high performance of the company. You can calculate it by using its formula.
Total Asset Turnover = Revenue / (Beginning Total Assets + Ending Total Assets / 2)
Operating Cash Flow
All the operation cost is managed through operating cash flow. Its positive values show the good financial performance of a company. On the other hand, negative values show that you need additional money to manage all operations.
Inventory turnover is also a financial performance measure. This measure is used to know if the inventory is excessive or not. You can calculate it by using the simple formula as given below:
Inventory Turnover = Cost of Sales / (Beginning Inventory + Ending Inventory / 2)
What is the Best Measure of Financial Performance?
From all of the above-mentioned top financial performance measures, the net profit margin is considered as best one. The best thing about the net profit margin is that it helps in investors in their decision making. The investor can check the net profit margin of any company. Based on sales volume, investors make decisions for further dealings. At organisational level, the value of net profit margin is considered as most authentic one. As it does not include tax or interest, so the calculated figures help in assessing the exact amount of profit or loss.
You can use all of the top financial performance measures as mentioned above. By using these financial performance measures, you can ensure a sustainable company and its production.