4 essential financial indicators that every business owner must follow

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In this article we will talk about:

The biggest mistake of (almost) every business owner

Any business owner needs to keep an eye on all areas of their business. Since the financial indicators to sales, production and inventory metrics. The problem is that this generalist view can often lead this manager to not have the real idea of ​​the most important details of his finances.

So, in my opinion, one of the biggest mistakes most business owners make is to have a cursory view of their finances. If you believe that knowing your income, expenses and whether you are making a profit or a loss is enough, think again. Nowadays, to make assertive and grounded decisions it is important to know these 4 indicators:

Financial Indicators 1 - Contribution Margin

This is perhaps the most primary financial indicator, since it is precisely he who will tell the company owner how much of the revenue from sales after the discount of direct costs to pay fixed costs and eventually make a profit. If you want to see in full how to get this result, read our article on what is and how to calculate the contribution margin.

See an example of the calculation of the average contribution margin in our balance point calculation worksheet:

Break-even worksheet - contribution margin

How to analyze this indicator:

The process is very simple, if your contribution margin is negative, it means that something is wrong, after all, it is impossible to pay the fixed costs with primary loss. If your contribution margin is positive, you will need other indicators (such as the break-even point) to understand whether this margin is sufficient or not.

Financial Indicators 2 - breakeven point

The breakeven indicator is extremely important because it is precisely it that will show you whether your goal to have no injury is feasible or not. Basically it tells you how many products (or projects) you need to sell to not get red. If you want to understand more about this calculation, see our post on how to calculate the break-even point of your business.

break-even point - consulting pricing

In the example of our balance point worksheet above, sales of 6 projects are required for the company to have no loss.

How to analyze this indicator:

Once again we will have a very practical analysis logic. You will need to compare the break-even indicator with your production and sales capacity. For example, if I need to sell 100 cars to my dealership to tie their income and expenses, but I can only produce 80 cars, it is a clear sign that my direct or fixed costs are greater than my capacity.

Another scenario would be you until you have the ability to produce 200 cars, but have an average sales of 50. In that case, either you need to invest in strategies to increase your sales or reduce costs, so you need to sell fewer cars to break even.

Financial Indicators 3 - Profitability

This is another pretty cool indicator to consider, because more than working with your company's revenues and expenses, it is a clear analysis of your operational efficiency. Basically, the profitability indicator will tell you what percentage of your revenue remains at the end of the month. See an example of this monthly calculation in our spreadsheet cash flow:

complete financial management - cash flow statement

How to analyze this indicator:

Basically, the higher the profitability, the better. Looking from the unique and unique point of view of this indicator, which stream would be most interesting?

  • Project A:
    • Revenue: R $ 100.000
    • Expenses: R $ 90.000
    • Profit: R $ 10.000
  • Project B:
    • Revenue: R $ 50.000
    • Expenses: R $ 40.000
    • Profit: R $ 10.000

If you analyze it well, you will see that the profitability of project A was 10% and that of project B, 20%, that is, project B has a lower percentage of costs than A. In your daily life, it is worth it is always worth looking at the company's overall profitability and analyzing where it is possible to reduce costs (direct or fixed) so that this profitability increases.

Financial Indicators 4 - Cash generation

Cash generation is closely tied to profitability, but now, rather than looking at percentage figures, it will also be necessary for the business owner to see the amount being "saved" by the end of the month. Generating and saving cash can be the difference between bankruptcy and the survival of a business because it is it that will allow the creation of a reserve fund for times of crisis or financial difficulty.

How to analyze this indicator:

The answer is a bit obvious, the bigger the indicator the better. To make it even more interesting, it is worth to target the cash generation goal with a value you wish to have for reserve fund and another for distribution of profits at the end of the year.

For example, if you want to have $ 120.000 of reserve fund and want to make a distribution of $ 240.000, you need to have an average of $ 30.000 of monthly cash flow so that you reach the end of the year with your goals contemplated and being put into practice.

Other important financial indicators

In my opinion these are the main 4 indicators that business owners need to keep an eye on. Now, there are some different business features that may make other indicators more important than what I mentioned here in this post. Therefore, I will list some others that depending on the moment of your company, may be essential:

  • Cash requirement (difference of accounts payable with accounts receivable)
  • Working capital (difference between short-term and short-term assets)
  • Financial projection (financial planning budgeted against the real)
  • EBITDA (earnings before interest, taxes, depreciation and amortization)
  • Indebtedness (liabilities on cash equivalents)

If you have any essential indicators that I did not contemplate here just write in the comments that it will be a pleasure to update our list.

How to control these indicators

No doubt understanding about these financial metrics is essential for any business owner, but another challenge may be to control these financial metrics in practice, so I've come up with a list of tools to help you with this challenge as well:

Or if you are interested, in a package that includes all of them:

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