The Three Financial Metrics Every Business Should Track

There are 100’s of ratios used to analyze financial statements if you are an investor.  Some of these ratios are specific to industries and business models, i.e. manufacturing vs. service.  Regardless, if you are the owner or a partner in an entity, there are three primary metrics that measure the financial health of your company, that should be reviewed periodically –

Profit – Funds available after total expenses are deducted from total revenues.  The basis from which taxes are calculated.  Pre-tax profits can be calculated monthly, quarterly, annually.  This value is ideal to plan annually.

Return on Investments (ROI) –  Ratio of Income generated over dollars invested in a process or product financed, to stimulate the growth of the company.  ROI is usually tracked for three to five years.  This statistic should be used to ensure that financial resources are being allocated to growth opportunities with the highest returns.

Free Cash Flow (FCF) – Funds available after paying expenses, adjusted for non-cash items, minus capital expenditures to maintain the firm’s current productive capacity, i.e. the amount available for distributions or future growth prospects. FCF is an annual measure.

A company should only allocate cash to the most profitable uses, with the highest return on investment, which will provide potential distributable benefits to its investors, within the shortest amount of time.

The preferable way to present this data is via a Scorecard that highlights Key Performance Indicators (KPI’s) that the company deems appropriate to gauge success at achieving strategic goals.  These reports are metric centric and show results over time.   As a general rule, KPI’s provide information which gives the reader a quick glance of success from a financial, operational, and risk perspective.  A successful scorecard will assist the company drive profitability, reduce costs and provide insight into risk.

What ratio do you use to track your success?

Author: Regis Quirin
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Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.
© Copyright 2013 Regis Quirin, All rights Reserved. Written For: CFO Tips - What you need to know, to be a CFO TODAY!

Regis Quirin

Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

28 thoughts on “The Three Financial Metrics Every Business Should Track

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  10. I have to agree with you Jeff. It all depends on your type of business and the company’s goals. Labor tracking KPIs such as Revenue per Employee is a great metric for service-based organizations whose “products” are actually the labor put into services. Again, it all depends on the type of business, the industry, and what benchmarks the organization puts into place.

  11. Regis – I agree that these are 3 of the most important performance metrics. Like you, I’m a seasoned finance executive. I also am an adjunct who teaches Financial Reporting and Analysis. Your are right in that there are literally hundreds of financial metrics to choose from. There is no one metric that is the silver bullet. It really depends on the market segment the business is in. One metric that I always use for my clients is Revenue per Employee. Its an indication of how efficiently a company uses its talent to generate revenue.

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