7 financial indicators that every micro and small business needs to know

Having robust financial planning is an important part of a successful business. In addition to tools such as reports, balance sheets, and cash flow, it is necessary to use the so-called financial indicators.

Through them, you get relevant information about the financial situation of the company and its prospects. For micro and small companies, this attention is even more important. After all, it allows you to optimize the management of finances.

Next, discover 7 important financial indicators to track in your business!

What are financial indicators and what are they for?

Financial indicators are metrics that help track the results of a company’s finances. Through these tools, it is possible to measure results, compare performance and follow the evolution over time.

In general, indicators work based on equations that use data generated by the business in a given period. In this way, they serve to generate information about the current situation of the business and short, medium, and long-term perspectives.

Why use financial indicators in your company?

As you have seen, the indicators serve to bring and deepen information about the finances of the business. Because of this, they are especially relevant for decision-making.

With the results obtained by the financial indicators, you are able to identify how the company’s situation is today, considering bottlenecks and improvements. Thus, there is a way to make more informed decisions, instead of making purely intuitive choices.

Financial indicators also help to bring a holistic and strategic vision to the business. If the idea is to increase investments in the company, for example, considering profitability indicators is essential.

Thus, it is possible to find opportunities to profit more and have the necessary resources. For micro and small companies, the indicators are even more relevant. Through them, it is possible to identify opportunities for improvement and anticipate threats.

In addition, optimized decision-making favors competitiveness, which can be essential for your company’s survival in the market.

7 financial indicators that micro and small companies should know

Considering that every micro and small company needs good information to make decisions that increase competitiveness, there are some financial market indicators that deserve attention.

Here are 7 examples of financial indicators that should be known, especially by smaller companies!

1. Gross margin

Gross margin helps measure the profitability of the business and operations. It demonstrates the gross profit obtained from each sale and, therefore, indicates the operational capacity to generate results for the company. This indicator is calculated as follows:

Gross Margin = (Gross Profit / Sales Revenue) x 100

The idea is to have a higher gross margin, as it will still suffer discounts until reaching the net result. In this sense, a very low value may indicate issues such as incorrect pricing or high operating costs.

2. Net Margin

The net margin is used to measure the profitability of the business in relation to what is sold. In this way, it is possible to understand how much the company is able to keep in cash, after tax collection.

The higher it is, the greater the ability of the business to consolidate earnings with each sale. A lower value, on the other hand, may indicate the need to rethink part of the strategy.

3. EBITDA

Still talking about profitability, it is essential to know the EBITDA or EBITDA of the business. It corresponds to earnings before interest, taxes, depreciation and amortization. As a result, EBITDA provides an even more complete view of operating income.

Through it, it is possible to know what are the results that the company is able to generate only based on its operational activities. From this indicator, therefore, it is possible to know the capacity to generate results and understand where the main cost bottlenecks are.

4. General Indebtedness Ratio

Every micro and small company must also know its level of indebtedness. To do so, it is necessary to calculate the General Indebtedness Ratio by the following formula:

General Indebtedness Ratio = Third-party capital / Assets

The greater the dependence on third-party capital — such as loans, financing, and investor participation —, the greater the indebtedness. In the long term, this can affect the growth and continuity of the business, which indicates the importance of tracking it.

5. Current liquidity

Understanding the liquidity level of the business is also important to know its ability to meet financial commitments.

In this case, current assets are the sum of cash and accounts receivable. Thus, the greater the current liquidity, the greater the company’s ability to meet its short- and medium-term financial commitments. Therefore, the stronger your financial health tends to be.

6. ROI

The return on investment (ROI) indicates what was the impact of the profits made in relation to what was invested. This is both for the business as a whole and for specific projects.

With ROI, it is possible to compare initiatives and find more profitable sectors or activities.

A positive ROI indicates that the project helped to monetize resources. A negative ROI, on the other hand, points to the loss of resources with the situation analyzed.

7. ROE

Another example among the essential financial indicators is the return on equity (ROE). Through it, you know how much the company managed to generate with its own resources, which indicates the operational capacity. 

A higher value for ROE indicates that the company is able to generate more results based on its equity. In general, this demonstrates good results in relation to the performance of the business and its finances.

With these 7 financial indicators, all micro and small companies can understand relevant issues about the business situation. Therefore, knowing them is essential to make a proper analysis of your venture and make informed decisions — in favor of the company’s success.

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