Money makes the world go round. It keeps businesses running and employees compensated. So as a business professional, it’s important to know important financial metrics and key performance indicators (KPIs) that impact your business to measure and analyze the health and success of your company. Whether you’re a manager or an individual contributor, developing financial acumen is a business skill that every professional should hone as they develop their careers.
Where You See These Metrics
There are a lot of metrics used in financial reporting, but before we dive in, here’s a brief rundown of the financial statements you need to know.
Balance Sheet: The balance sheet is a snapshot of a company’s assets, liabilities, and shareholders’ equity at a specific point in time
Income Statement: The income statement shows a company’s revenues and expenses over a period of time.
Cash Flow Statement: The cash flow statement includes the company’s cash inflow and outflow due to its operating, financing, and investing activities.
Annual Report: An annual report is a comprehensive document that public companies must prepare annually for shareholders that details their operations and financial performance. The annual report includes the balance sheet, income statement, and cash flow statement, in addition to other important company information.
The Metrics You Need to Know
Contribution Margin: Contribution margin is the revenue generated from a product or unit sold after subtracting variable costs. It can be calculated two ways: gross and per unit.
- Gross: Contribution Margin = Sales Revenue – Variable Costs
- Per Unit: Contribution Margin = Selling Price per Unit – Variable Cost per Unit
Cost of Sales: Costs of Sales, also known as Cost of Goods Sold, is the cost of producing goods. It takes into account all the direct costs of producing goods and excludes indirect costs, like marketing.
- Cost of Sales = Inventory + Purchases – Ending Inventory
Current Ratio: Current Ratio measures a company’s ability to meet short-term obligations.
- Current Ratio = Current Assets / Current Liabilities
Debt to Equity Ratio: A company’s debt to equity ratio measures a company’s financial leverage. It’s a metric that shows how much a company is financing operations through debt versus their own funds.
- Debt to Equity Ratio = Total Liabilities / Total Shareholders’ Equity
EBITDA: EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It’s a measure of a company’s overall financial performance.
- EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Earnings per Share (EPS): EPS measures a company’s profitability per outstanding shares of stock.
- EPS = (Net Income – Preferred Dividends) / Average Outstanding Common Shares
Profit Margin: Profit margin gauges how a company is handling its finances (i.e., profitability).
- Profit Margin = ((Sales – Total Expenses) / Revenue) x 100
Return on Investment (ROI): ROI is a ratio between net income and the cost of an investment to measure profitability. It compares the gain or loss of an investment to its cost.
- ROI = (Current Value of Investment – Cost of Investment) / Cost of Investment
Working Capital: Working capital measures a company’s liquidity (i.e., the ability of a company to raise cash if it needs it). It looks at the difference between current assets, like cash, accounts receivable, and inventory, and current liabilities, like accounts payable.
- Working Capital = Current Assets – Current Liabilities
Financial acumen is one of our core content pillars for the Females in Food community. We can’t stress enough how important it is for working professionals to develop this skillset as it’s a critical competency when advancing into senior leadership positions. Join the Females in Food community today to surround yourself with high-performing women who can help you hone your financial acumen, achieve your goals, and more!