What are the most vital company key figures?

Key financial metrics (commonly expressed as ratios) come in all shapes and sizes. But which figures do companies actually require in order to know they are on top of growing their business?

Basically, three areas indicate the success or failure of a company: ability to pay, business efficiency and sustainability – in other words, liquidity, profitability and financial soundness. There’s no getting around this triad:

• Short term: liquidity
• Medium-term: profitability
  
• Long-term: soundness or strength of the balance sheet
  

In most cases, a few key figures from these three areas alone, depending on the company, are enough to monitor the course of business. Make sure you really understand these figures yourself. This is not a task you can delegate to employees.

The first performance indicator is not actually one at all. By definition, short-term liquidity stands for something liquid and dynamic. It should be planned for in advance to cover a period of time in the future and, of course, secured, because liquidity problems are by far the most common reason a corporate crisis escalates. At best, key liquidity figures serve as indicators that relate only to a fixed reference date. Nevertheless, liquidity planning is indispensable for running your day-to-day business. And it must take the entire value chain into account – from order to receipt of payment after invoicing. Simply put: the greater the value added, the longer the planning horizon you need:

• For retail companies with less internal value-added, this horizon is four to six months.
  
• For manufacturing companies, it is at least six months, as such companies must plan for the longer term.
  

Planning will help you master even unstable phases, because although falling sales will improve liquidity in the short term, sales growth will tie up funds. In growth phases, accounts receivable increase and inventories grow, tying up liquidity. Additional employees may also be hired during such phases, which in turn will require increased liquidity at the end of the month.

If you underestimate the impact of growth, you will need to find liquidity quickly: for example, by delaying accounts payable invoices, reducing inventories or borrowing.

Learn more about how you can plan the liquidity of your SME (DE).

A cash flow statement shows where cash and cash equivalents come from (cash flow, financing, divestments) and where or how they are used (fixed or current assets, dividend distributions and so on). This is how we arrive at business efficiency – i.e., the profitability – of a company.

A variety of key figures can be used to calculate profitability: at the center is the relationship between a company’s profit or cash flow and its sales or expended capital. The ratio of earnings before interest, taxes, depreciation and amortization (EBITDA) to sales is particularly revealing when assessing profitability.

Profitability in industry comparison

How high the EBITDA margin should be depends strongly on the industry. For a manufacturing company, more than 10 percent is considered healthy. The figure will be lower for trade and service companies, because of their lower propensity to invest: For such companies, a margin of between 3 and 6 percent is sufficient.

Good to know: the difference between EBIT and EBITDA

• EBIT (Earnings before Interest and Taxes): earnings excluding interest and taxes
• EBITA (Earnings before Interest, Taxes, Depreciation and Amortization): earnings excluding interest, taxes, depreciation and amortization
  

The bedrock of a company is the structure of its balance sheet, which reveals its financial soundness and strength. Depending on the industry, different assets are central:

• Manufacturing companies: Fixed assets are key. Durable capital assets should also be financed on a long-term basis. Equity and long-term debt capital must at least cover fixed assets. Ideally, they should exceed it, so that equity can be held aside as a reserve to cushion any losses. We therefore recommend a ratio of equity and long-term debt capital to fixed assets of approximately 120 percent.
  
• Retail companies: Current assets are key. The primary concern is in assessing business risks and the demands on equity. Sound, non-producing companies should have an equity ratio of at least 30 percent; for industrial enterprises, this should be at least 40 percent but preferably 50 percent or more.
  

Productivity ratios are not financial key figures in the narrow sense, though they still provide information about how well your company is performing. Depending on the company and key figure, entrepreneurs develop a sense of how productive the working day was. Depending on the industry, productivity ratios include different metrics that are relevant in the assessment. Three examples:

• Labor productivity: Expresses the labor output of a given period in the past: for a consulting firm, this includes approximate hours billed per number of employees; for an industrial firm, it includes the number of units produced per hour.
  
• Machine productivity: Expresses how efficiently machines in an industrial operation are running and producing.
• Capacity utilization: Expresses the utilization of employees and/or machines. Ideally, a company produces so many products and services that all employees or machines are kept fully occupied.