Identifying financial data for better decision making

This article is a submission by D&V Philippines. D&V Philippines has years of experience in the accounting and finance industry. This third-party services company can generate the financial reports you need to make real-time financial decisions. 

The direction your business follows and the decisions you make need to have a financial basis. Doing so enables you to reduce or manage risks, allocate resources effectively, and maximize profits.

Your company’s past and current financial data provides your team with insights into growth opportunities that present minimal risk and maximum potential.   

Essential financial data to look into

The use of financial data enables you to formulate strategies that provide a competitive advantage. Below are the data sets you need to identify and use:

Profitability ratios

Ratios provide you with insights into how effectively your campaigns, sales, and other activities generate profits.

A profitability ratio is a metric you can use to gauge the efficiency of your operations. It enables you to identify aspects of your operations that need corrective actions.

The ideal ratio you must target depends on your niche. Use your competitors’ available financial data to determine if your company is up to par with everyone in your niche.

Establish actionable and achievable objectives that allow you to improve your company’s profitability ratio. 

Profits

High profits allow your business to take negative effects on your revenues and costs of goods sold without risking your ability to sustain your company and pay expenses on time.

The number to assess is the operating profit margin. The latter shows the profit your business generates from operations before deducting interest and taxes.

The ideal margin varies depending on the industry you’re in. The net profit margin is another metric to review.

This enables you to determine if your business generates enough profit from sales. It also allows you to know if you’re managing costs efficiently.  

Availability of net cash

As the cliché in business goes, cash is king. The latter statement rings true for any business regardless of industry and size.

Without cash, a company can’t operate at maximum capacity and realize its potential. You get this metric by deducting obligations and liabilities from your gross cash.

Your net cash availability is a metric you can use to determine the readiness of your company to expand, invest, develop new products, or move a project forward.

If your net cash is too low, you’ll have difficulties making investments and growing your company. 

Increases in revenue

Revenue growth is an important indicator that may determine the trajectory of your business. To get this number, deduct the last period’s revenue from the current period’s revenue.

The next step is to divide the difference between the two with the last period’s total revenue.

The revenue growth metric enables you to determine the quality and quantity of the revenue streams your company generates. Find ways to diversify your revenue streams.

If you’re relying on one client to generate more than 10% of your revenue, you might have a difficult time when you lose them. 

Efficiency of operations

This metric enables you to determine the efficiency of your company when it comes to using and maximizing its resources.

Low-efficiency levels result in stagnant or no growth and reduced profits. Two other metrics that measure operational efficiency include: 

• Accounts receivable turnover – It gauges efficiency when it comes to managing credit accounts and collecting dues from customers.  
• Inventory turnover – This metric measures efficiency in managing inventory levels based on demand and sales. This also shows the number of times your business was able to move goods and replenish them within a specific timeframe.You get this ratio by dividing the cost of goods sold by the average inventory within the same timeframe.  

Liquidity of your business

An assessment of your business’ liquidity allows you to determine its ability to generate cash to pay expenses. The profits you make may be insufficient to cover cash expenses if your company isn’t liquid.

The current ratio is a metric you can use to measure your company’s liquidity. You get this figure by dividing current assets by current liabilities. The adequate current ratio for businesses is a value higher than 2.

This means that your company has enough cash to fulfill its obligations. If your current ratio falls below a value of 1, you’ll need to find ways to increase your cash reserves.  

Growth indicators

This indicator evaluates the sales and market share growth of your business. This shows the financial acceptability of the losses you might incur when you grow your company.

Growth often reduces profits, constricts cash flow, and has a short-term negative effect on your return on investment.

Improve your asset management to reduce your company’s reliance on loans and manage cash flow to an acceptable level. Identify the average growth rates in your niche to determine if your growth rate is up to par. 

Solvency of your company

If your business has investors, they’d want to know their return and how efficient your team is in handling and using capital. These are ratios you can use to show your investors: 

• Debt to equity ratio – You get this figure by dividing your business’ debt by its equity. If this ratio is above the industry average, it might mean your business will have a difficult time paying liabilities. 
• Return on equity – You get this metric by dividing net income by equity. This shows the effectiveness of your business in generating a profit. 

Once you have these ratios, you can evaluate your business and determine if you need to improve your profit-generating practices and strategies. 

Analyzing financial data

The mixed use of analytics and financial data allows you to create and implement measurable objectives and strategies. These enable you to establish a long-term plan for the growth of your business.

A data-driven approach allows you to identify the best possible direction and solution for your company.  

You’ll need updated accounting books to determine and analyze the numbers you need to create a data-driven strategy. Mistakes in your books and erroneous data can lead to costly decisions and missed opportunities.

D&V Philippines can assist you. Its team can do the bookkeeping and updating while you focus on analysis and strategizing.