Financial indicators are essential tools for assessing the health and performance of a business. They help us understand a company’s profitability, liquidity and operational efficiency , enabling better decision-making.
But what are the main indicators that should be monitored? How do they work and how do they impact financial management?
In this article, you will understand everything about financial indicators, from the concept to their practical application, with examples, calculations and tips to extract valuable insights for your company.
What are financial indicators?
Financial indicators are metrics used to measure a company’s economic and financial performance . In other words, they allow us to understand operational efficiency and other aspects, such as:
- identify financial problems before they impact the company’s operations;
- anticipate challenges and opportunities for growth;
- understand the business’s investment and expansion capacity ;
- improve financial transparency and facilitate audits;
- define strategies to optimize costs and increase productivity.
How do financial indicators work?
Financial indicators are extracted from accounting and economic data, allowing a quantitative and qualitative analysis of business performance .
These indicators are calculated based on information obtained from the financial statements,
- Balance sheet : to assess assets, liabilities and equity.
- Income Statement ( IS ) : to understand revenue, costs, expenses and profit.
- Cash flow : to measure liquidity and payment capacity.
Furthermore, by monitoring these indicators regularly, companies can:
- measure financial performance : identifying profitability and level of debt;
- make strategic decisions : such as adjustments in costs, investments and pricing of products or services;
- anticipate risks and opportunities : detecting financial problems before they become critical;
- compare performances over time : observing trends and correcting deviations in strategy;
- support negotiations with investors and creditors : demonstrating the financial solidity of the business.
It is important to emphasize that the indicators do not work in isolation, they must be analyzed together to provide a complete overview of the company.
Main financial indicators that companies should monitor
Monitoring financial indicators enables a firm to analyze its performance and make decisions based on informed judgments. Bearing this in mind, we have assembled the key financial indicators that any company should track.
1. Profitability indicators
They assess the company’s ability to generate profit in relation to revenue or invested capital.
- Gross Profit Margin : Measures profitability before operating expenses.
Example: If a company had a turnover of R$500,000 and had a production cost of R$200,000, the gross profit margin will be 60%.
- Net Profit Margin : Indicates the percentage of revenue that becomes profit after all expenses.
Example: If after all expenses a company obtained R$50,000 in net profit on revenue of R$500,000, the net profit margin will be 10%.
- Return on Investment (ROI) : measures the efficiency of investments made.
Example: If a businessman invested R$100,000 in a new product and made a profit of R$30,000, the ROI would be 30%.
2. Liquidity indicators
They assess the company’s ability to meet its short-term financial obligations.
- Current liquidity : indicates whether the company has sufficient resources to pay its short-term debts. Formula: Current Assets / Current Liabilities
Example: If a company has R$80,000 in current assets and R$50,000 in current liabilities, its current liquidity will be 1.6, that is, it can pay its short-term obligations.
- Dry liquidity : assesses liquidity without considering inventories, making the analysis more conservative. Formula: (Current Assets – Inventories) / Current Liabilities
Example: If the company has R$80,000 in current assets and R$20,000 in inventory, and current liabilities are R$50,000, the dry liquidity will be 1.2.
3. Debt indicators
Measures the company’s overall debt level in relation to its own capital and other assets.
- Total debt : indicates the proportion of debt in relation to the company’s assets.
Example: If a company has total assets of R$500,000 and total liabilities of R$200,000, the overall debt will be 40%.
- Degree of financial leverage : measures how much the company relies on third-party capital. Formula: Total Liabilities / Equity
4. Operational efficiency indicators
They assess productivity and efficiency in generating revenue.
- Asset turnover : measures the efficiency of using assets to generate revenue. Formula: Total Revenue / Total Assets
- Financial cycle : measures the time required to convert working capital investments into revenue. Formula: Average Collection Period + Average Inventory Period – Average Payment Period
These indicators provide an essential overview for strategic decision-making and the financial health of the business. Monitoring these metrics regularly allows you to correct errors and improve the company’s financial management.
How to analyze a financial indicator?
For financial indicators to be truly useful, they need to be analyzed correctly. Here are the essential steps.
- Define which indicators are most relevant for your business.
- Compare values with previous periods to identify trends.
- Carry out benchmarking with companies in the same sector.
- Relate different indicators for a broader view.
- Make decisions based on the data obtained, adjusting strategies as necessary.
Remembering that the correct interpretation of indicators helps to make informed decisions and avoid financial traps.
How to calculate financial indicators?
Financial indicators can be calculated manually or with the support of automated tools. Check out some tips!
- Use up-to-date financial reports to get the correct figures.
- Automate calculations with financial software and ERPs to avoid errors.
- Analyze results periodically and compare with industry benchmarks.
- Interpret data in a contextualized way, considering seasonality and external factors.
Therefore, financial indicators are essential tools for business management. By monitoring them regularly, it is possible to better understand the financial health of the business, reduce risks and make more assertive decisions.