Demaurio Clark your business’s financial status is the No.1 indicator of your business’ health, and also it is growth potential in the future. To ensure better financial health, entrepreneurs need to keep close track of their business’s financial status. The first step towards it is to have the essential financial literacy to understand the business’s financial analysis. A good financial analysis may consist of four key elements, which we will discuss here in detail.
Revenue is the primary source of cash for your business. Quality, quantity, and also the timeframe of revenues will determine the long-term success of a business. Here are some key terms related to revenue.
- Revenue growth – This is the revenue of the given period divided by the last period’s revenue.
- Revenue concentration – This is the revenue from a client divided by the total revenue. If a single customer contributes to a larger percentage of your revenue, then there is a possible threat to your finances if that customer discontinues.
- Revenue per employee – Total revenue divided by the number of employees. This is the ratio to measure the productivity of your business. The higher this ratio is, the better your business is.
2. Profits as explained by Demaurio Clark
If you cannot make product quality profits or services consistently, it is a rare chance for your business to survive.
- Gross profit margin – The revenues minus the cost of sold goods divided by the total revenues. A business needs to have a healthy gross profit margin to be creditworthy.
- Operating profit margin – The total revenue minus the cost of sold goods and also operational expenses divided by the revenues. Higher, the better.
- The net profit margin is the total revenue minus the cost of goods. Sold and also operating expenses divided by revenues. As Demaurio Clark points out, this is the fund that remained for reinvestment into the business or distributed to the shareholder as dividends.
3. Operational efficiency
This is a measure of how well the company’s resources are performing. Compromised operational efficiency may lead to lesser profits and also impaired growth. Here are some terms related to operational efficiency.
- Accounts receivables (AR) turnover – Net credit sales divided by the average AR. Higher AR turnover means that you manage the credit well, and also a lower number is an alarming sign.
- Inventory turnover – This is the cost of goods sold divided by the average inventory. It measures the efficiency of manage inventory. A higher number is a welcoming sign, and also a lower number means you are not selling well.
4. Capital efficiency/solvency
These generate interest to investors and also lenders. Here is the terminology related to the same.
- Return on equity – The net income is divided by shareholder equity. This is the return to investors from the business.
- Equity debt – This may vary from time to time, but a general indicator of how much you leverage in terms of operations.
Along with the above, you may also know the term liquidity, which addresses the business’s ability to generate enough cash to meet the expenses.