Most businesses double down in Q4 to achieve their plans. The last months of the year offer a final chance for companies to meet or exceed their goals.
Data from the Bureau of Labor shows that nonfarm business labor productivity increased by 1.7% in the fourth quarter of 2022. Around the same time in 2023, the country's real GDP increased at an annual rate of 3.3%. As Q4 gradually comes to a close, businesses are striving to reach their year mark and looking to positive financial indicators that will keep them on the playing field. Below, we unpack the top financial indicators to track at this time.
Financial performance indicators are simply signs and objective measures used to determine how well an organization is performing. They measure how a business is fairing and compares with competitors in terms of financial health and other essential factors for survival and sustainability. The results from these checks reflect negatively or positively on a business because they tell investors and other stakeholders about the general well-being of the organization. Financial indicators are relevant in every font. It's a sign for employers to know if the business is built for the long term and if they have a future working there. For the business owner, these metrics help determine how profitable the enterprise is and other key factors like its revenue generation and asset and liability management model.
The profit margin is the amount businesses keep at the end of their operations. It comes in various forms: profit margin, net profit margin, and operating profit margin.
The gross profit margin gives businesses a view of the profit remaining after subtracting the costs and goods sold. That is the company's revenue after considering business costs. This metric offers insights into how efficient and profitable a company's operations are. The ideal range is around 30-35%, but it could vary across industries. It is calculated by dividing the gross profit by the total revenue and multiplying it by 100.
The net profit margin is the amount a company or business keeps after deducting expenses and taxes. It is easily calculated by subtracting total expenses (including tax) from total revenue. Lastly, the operating profit margin measures how much a business earns as profits from a dollar of sales after deducting all expenses.
Revenue growth is a measure of a company's upswing in profitability. If the business shows an upward trajectory for a long time, it indicates rising performance and productivity. It measures how much more a business made this year compared to the previous year. This indicator is determined yearly by dividing the rate of increase in total revenue by the total revenue from the same period last year.
The current ratio is a standard liquidity ratio for businesses. It measures how much resources a firm has to meet its short-term obligations. It is the ratio of the business's current assets to its current liabilities. Some of these obligations or liabilities include deposits for work to be done during operations, prepayment to service providers, and bank debts. This metric informs stakeholders and investors of the company’s capability to cover its short-term debts enough to be sustainable financially. If a company has a ratio of less than one, it's likely it won’t be able to meet its short-term obligations.
Business liquidity is very similar to how it works in the forex market. Just like it measures how a pair like EUR/USD can be easily traded in forex, the liquidity of a business measures how quickly a company can convert its assets into cash without losing significant value on the market. Liquidity and current ratios are quite similar, but the type of asset differs. This metric involves all items (e.g., stocks) the company can liquidate in the next 90 days. On the other hand, the current ratio has to do with all current assets like inventories, prepaid expenses, and marketable securities.
The debt-to-equity ratio measures how much debt a business has compared to other assets. A high debt ratio is a risky investment because it comes with a lower likelihood of being able to repay debts. At the same time, the cost of borrowing and equity might increase, raising the weighted average cost of capital (WACC) and driving the businesses' share price to the ground. On the other hand, if the results are lower or close to zero, such a business can run independently without debt finance. The goal of every business should be to run at the minimal debt possible.
Regardless of the size of your enterprise, it is crucial to check the metrics listed in this article from time to time. The earliest stage of every business is the most demanding for reasons like difficulty in establishing a customer base and attracting investors. A proper check from time to time is essential to keep the company afloat, especially if you're looking to get investors' attention, scale, and attract a larger audience. For large-scale businesses, living through competition, rising liabilities, stakeholders, and assets gets even more challenging. These metrics will be helpful for large-scale and small companies in tracking performances, monitoring profits, and determining how products and services perform in the market.
