Having a thorough understanding of your company’s performance can enable you to make better-informed decisions and take advantage of growth opportunities.
Assessing your business performance can be tricky. However, with the right data and the right direction, you can start building a better understanding of what is going on with your business.
Profitability is always a core topic in financial decision-making, so let’s look at some of the ratios you should be paying attention to.
Net Profit Margin
Net Profit Margin is one of the most popular ratios out there, and for a good reason. The net profit margin shows you the percentage of revenue that stays in your company (as net income) after all expenses (including tax, interest, and depreciation) are paid. You calculate this ratio by dividing net profit by the revenue generated during the same period.
A ratio of 20%, for example, means that for every dollar that your company can generate, you ultimately get to keep 20 cents. By tracking this ratio over time, one can determine whether current business practices and strategies are, in fact, effective. For example, a decline in net profit margin will either mean that revenue has fallen or that your expenses have gone up. Once you’ve identified the cause, you will be in a much better position to take action.
Return on Assets (ROA)
This ratio measures the net income produced by your company’s assets over a given period. Computing this ratio enables you to measure how effective your company is managing its assets to generate profits.
Whenever you invest in your business, whether by buying property to expand your offices or buying computers and servers to develop software, you are always looking to generate value. Ultimately, ROA tells you how good a company is at putting its assets to work.
To calculate this ratio, divide net income by the average total assets of the company.
Why are these ratios effective, and how often should you be using them?
Profitability ratios are not only useful for evaluating the efficiency of your business. They are also an essential tool to compare how well the company is operated versus similar companies in the same industry. By taking a close look at these ratios, you will be better equipped to identify different ways to improve your business.
Lastly, while you don’t need to monitor these values daily, is it important to revisit them regularly, either once a month or at least every quarter. All you need to get started is to have the right numbers in place, and luckily, we’re here to help!
SmartConcil is a cloud-based platform for midsize & enterprise companies applying automation to the reconciliation process in order to ensure high accuracy & real-time visibility into your company’s financial numbers.
With numbers you can trust, measuring your company’s financial performance will be much easier.
Learn more about how SmartConcil can help your business by visiting https://www.smartconcil.com/