Most CEOs believe they know their numbers. However, describing their revenues, employee headcount, and how much cash is in the bank is not much different from an individual sharing their income, how many children they have, or the available balance on their ATM receipt. CEOs of growing organizations need a more sophisticated picture of their business’ financial metrics in order to determine how to develop KPIs. No matter your industry, every CEO should closely track these 5 financial indicators to best navigate their business.
1. GPM (Gross Profit Margin)
GPM is how effective the organization is at making money from its revenue production activities. It compares the cost of the goods or services to the income derived from those costs. When compared against others in your industry, it is a powerful tool for determining productivity.
2. EBITDA (Earnings Before Interest, Taxes, Depreciation/Amortization)
This measures profitability in a company and, in a privately held company, is often called net operating income or “bottom line”. Would you rather have a $50M size company that manages 500 employees with an EBITDA of $2.5M (or 5%) or a $20M size company that manages 150 employees with an EBITDA of $2.5M (or 12.5%)?
3. Current Ratio
A current ratio measures liquidity in an organization and simply tells you a company’s ability to pay short-term obligations as they become due. It’s a simple calculation that can tell you whether or not you will have enough money to pay your debts over the next 12 months. With a little understanding of the balance sheet, this ratio can be quickly calculated and monitored each month.
This measures the extent of leverage in an organization. It indicates how much of the company’s equity and debt are being used to finance the assets. A company that has a lower debt/equity ratio has a less risky financial structure. A bank will closely monitor this ratio since it can provide an indication that a company is becoming overwhelmed by debt. CEOs should know the health of their capital structure and this ratio can help give them a glimpse into this metric.
5. 1 to 3 Industry Metrics
Based on what is most critical to track in your industry, CEOs should be monitoring 1 to 3 indicators as compared to others in their industry. For professional service firms, for example, some indicators can include chargeability ratios, profit per employee, or AR average days outstanding. Each industry will have its own indicators that help drive profits. A CEO should know these, along with where they stand against their competitors and monitor these indicators on a monthly basis.
By knowing these critically important indicators, CEOs can take the leap from a short-term and shortsighted view of the organization to a more strategic, longer-term view focused on indicators that drive profitability, cash flow, and shareholder value.
If you need help identifying valuable industry metrics to track or need the professional experience of a CFO, contact us today for your consultation.Tags: Accounting, best financial indicators, business, Ceo, Debt, EBITA, EBITDA, Equity, Financial, finanical metrics, how to develop kpis, Indicators, Margins, Profit, Ratios, Valuation
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