Understanding where the bottom line stands remains a keystone of business strategy. With financial performance solutions that use data analytics, it's possible to get a better picture of where a company stands in terms of profitability. However, there are many different measurements that have a hand in determining fiscal capacity. These are dependent on factors such as cash flow and financial statements to shareholders and regulators. By collecting accurate metrics from this form of data, it's possible for businesses to have a much better idea of where they stand financially.
Understanding the cash flow situation
For many businesses, the most basic metrics that determine financial performance are net cash flow and return on investment. However, these functions are crude at best. Still, as Business Case Analysis noted, cash flow metrics are essential because they help determine fiscal actions such as acquisitions, spin-offs and investments based on what the money-on-hand situation is.
One of the suggested measurements to look into is future value, which is the value of money companies will receive at some point in the coming months or years. This gives companies an idea of what they will gain out of a specific investment. Another metric specific to assets is the total cost of ownership, which concerns how much a business will spend on a specific property throughout the course of its life cycle. That includes the cost of acquisition, implementation, operation, maintenance and disposal of the item in question, whether it is real estate or equipment.
Metrics for others
There are certain measurements that companies may not need for themselves, but must still capture for the sake of shareholders, customers and regulators. These metrics often take shape in financial statements such as income statements, balance sheets and retained earnings. Because of the extensive documentation requirements, there is a trove of data available to assess financial performance.
Such instances of financial statement metrics include liquidity measures such as working capital and current ratio, which help determine whether a firm has the capacity to meet short-term obligations, and leverage metrics that determine the source of cash on hand such as total debt to asset ratio. Profitability metrics are of particular concern. The Journal of Accountancy suggested to pay attention to return on equity, which assesses how much income is made off ownership interest. Businesses can only determine that partly alone, which is why they should pair it with return on net original assets. All of these statistics, when input into a financial performance analytics platform, can give a clear fiscal picture.