Wednesday, February 14, 2018

The top 5 financial metrics that can create a competitive advantage


Regardless of the size of a company, it is empirical that every organization knows and fully understands their current standing, their goals and aspirations, and how to attain these set goals. Financial metrics have traditionally been an indicator of a company´s overall performance. Each finance department is expected to establish and track specific financial goals in an interdepartmental and integrated manner to enable the organization to function effectively.

These financial goals and metrics, often patterned after industry standards, acts as important indicators of a company´s success as it allows organizations to link strategic goals to direct performance and it connects relevant information to important decisions.

Here are the top 5 financial goals and metrics (in no particular order) that can create a competitive advantage for an organization:

Cash Flow

Cash flow represents the cash on hand after deducting investment and working capital increases from the company´s operating cash flow. It is usually used as a measure of a company´s financial health. It is an indicator of how well its resources are being managed and how they are utilized to generate more cash for other investments. This metric is important for companies when forecasting a significant capital expenditure or when following through a specific project.

Asset and Risk management

This metric is all about optimal management of cash, receivables, inventory (aka current assets) as well as management of payables and accruals and the efficient management of its working capital and cash conversion cycle. This is an important metric when a company is evaluating its performance against benchmarked companies.

At the same time, it is also important for a company to manage uncertainties through proper and timely identification, measurement, and control of current risks in terms of corporate governance and regulatory compliance. This metric is important because companies must undertake serious assessments when anticipating greater uncertainty in the business. A process must be in place to assess likelihood of occurrence, its financial impact, and ways of mitigating the cause and effects of the risks identified.

Growth Indices

This metric enables companies to assess and evaluate market share growth, sales growth, and acceptable trade off growth in terms of reductions in cash flows, profit margin, and ROI.

Growth oftentimes depletes cash and reserve borrowing funds such that rigorous asset management is required in order to manage cash flow and to limit borrowing. This metric ensures that companies set growth index goals when growth rates are not as forecasted in comparison to benchmarked companies in the industry.
Profitability ratios

This metric is used to measure operational efficiency. It indicates areas for improvement and the areas that need corrective measures. This metric ensures that companies set profitability ratio goals when they need to operate more effectively and when they want to pursue other improvements within the business.

Tax Optimization

This metric ensures that there is management of tax liability undertaken as an organization conducts business and as an organization tries to reduce the expected taxes. For any company, new acquisitions or projects must be weighed against tax implications and net after tax contribution to the company´s value. A company´s performance must be measured on an after tax basis as much as possible.

Having all these financial metrics fosters a culture of a balanced scorecard as a means to evaluate the performance of the company. It is undeniably an open secret that several strategies fail on execution which is why these metrics will assist companies in implementing and monitoring their strategies by having specific, measurable, realistic, and industry related goals.

Business Visibility

Accurate and real time visibility into the business through an automated financial system is very important in order to track the key performance indicators of a business. It has become very important that every organization has an ability to pull data across the organization and compile it in an intelligent and automated way in order to scale operations quickly and effectively.

Modern technology has now allowed companies to have readily accessible data that can afford them greater predictability and better forecasting of revenues, expenses, cash flow, etc. By benchmarking these metrics, companies can have early warning signals in order to correct certain areas immediately before it affects the financial health of a company. Just as important is the ability to manage non-financial metrics.
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