Unlocking insights: benchmarking and other critical metrics for effective financial reports

Benchmarking against competitors, industry standards and to track key financial metrics is an essential element of sound strategic decision-making and effective financial reporting in the modern era. It helps businesses to better understand their financial position and to stay competitive by identifying best practices. 

There are a variety of benchmarking tools available, including industry benchmarks that compare the business’s financial performance to its peers, and third-party benchmarks offering detailed insight and analysis. 

Sage Intacct is a modern, cloud-native solution that delivers the necessary financial and accounting capabilities to enable businesses to stay ahead of the curve.

Providing data integrity and real-time insights to make informed management decisions, Sage Intacct offers automated reporting to boost productivity and worker satisfaction; state-of-the-art security and compliance; speed and agility; and the capacity to incorporate financial innovations.

In addition to benchmarking, it’s also important to measure key financial metrics such as cash flow, revenue and profitability, debt and business efficiency. 

Cash flow metrics

These help the business to ensure liquidity and adequate cash reserves to meet short-term obligations. The most important cash flow metrics are: 

• Operating cash flow: This measures how much cash the business is generating and whether it is sufficient to sustain operations. Too little operating cash flow and the business needs to either increase sales or reduce its operating costs. When the business has more cash coming in than going out, it can use the excess cash to pay off debt, increase its cash reserves or invest in business growth. 
  
  
• Cash conversion cycle: This measures the time it takes to convert inventory into cash — in other words, how long is it before the business sees a return on its investment. The shorter the cycle, the better. Businesses that supply larger corporates are typically paid on terms. If those terms include longer cycles, the business might need to consider working capital to bridge the gap until payment is made. 

• Free cash flow: This measures how much cash is left after the business has paid for capital expenditures such as new machinery. How much free cash flow a business generates is key to decision-making. 

• Productivity: This is heavily affected by profit and positive cash flow. A company’s productivity level can be determined by comparing the revenue generated by the output to the cost of resources used to produce the resources. The higher the level of productivity, the more profitable and sustainable a business is. 

Tracking revenue and profitability metrics

These help businesses to make better decisions, measure their performance and identify areas for improvement. Key revenue and profitability metrics include: 

• Net profit margin: This measures profitability after factoring in all other expenses. The higher the net profit is, the more profit a business will make. 
  
  
• Gross profit margin: This measures a company’s profitability, taking into consideration only the direct cost of producing the product or service. If the gross profit margin is low, the business could consider adjusting its pricing strategy or find other ways to improve profitability.
  
  
• Earnings before interest, tax depreciation and amortisation (Ebitda): This measures the core profitability of a business by excluding non-cash accounting expenses such as depreciation and amortisation and non-operational expenses of interest and tax. It is the most common profitability metric used by investors to assess the value of a business.
  
  
• Revenue growth rate: This measures the rate at which revenue increases over time. A higher revenue growth rate indicates the business’s market share is growing.
  
  
• Customer acquisition cost: This determines the cost of acquiring a new customer. This is calculated by dividing the total amount spent on marketing and sales by the number of new customers acquired during a specific period. It’s possible to drill down even further by comparing the customer acquisition cost to the average revenue generated per customer. This metric reveals whether the business is investing sufficiently in customer acquisitions.
  
  
• Customer lifetime value: This measures the total value a customer brings to the business for the duration of the relationship. Marketing and sales strategies can be optimised for more valuable customers. Businesses with a strong focus on customer lifetime value typically enjoy higher customer retention rates, increased customer satisfaction and long-term, sustainable growth. 

Market metrics

These provide an understanding of the business’s financial performance compared to competitors and the market in general. Typical market metrics include: 

• Earnings per share: This measures profitability and the value the business provides to shareholders. The higher the earnings per share, the more attractive the business will be to investors. 
  
  
• Price-to-earnings ratio: This measures the business’s stock price relative to its earnings per share and is a good indication of whether the market perceives the company as over or undervalued. 
  
  
• Market share: This is the percentage of total sales the business has in a particular company or product. 
  
  
• Market capitalisation: This measures the company’s total market value and is calculated by multiplying the current market price of a company’s stock by the total number of shares outstanding. 

Debt and solvency metrics

These are also important to track. High debt levels are usually a red flag, indicating issues with the company’s financial stability. Businesses with high levels of debt and low levels of solvency are less able to weather financial crises. Typical debt and solvency metrics to consider include: 

• Debt-to-equity ratio: This measures how much debt is used to finance operations compared to the business’s equity. Too much debt is reflected in a high debt-to-equity ratio, which is not ideal, indicating that the business’s leverage may need to be reduced. 
  
  
• Interest coverage ratio: This measures the business’s ability to pay interest on debt. 
  
  
• Current ratio: This measures whether the business has sufficient assets to cover their current liabilities. 

Tracking efficiency metrics

Improving operational performance and overall business efficiency requires tracking efficiency metrics. Not only do inefficiencies reduce profit but they are also expensive. Typical efficiency metrics include: 

• Asset turnover: This measures how efficiently the business uses its assets to generate revenue.
  
  
• Inventory turnover: This measures how efficiently the business manages inventory and how quickly products are sold. When inventory turnover is low, it’s an indication that the business is holding too much inventory. 
  
  
• Days sales outstanding: This measures how long it takes to collect payment from customers. 

Using tech to unlock financial insights

Each industry and business sector will tend to have its own relevant benchmarks and metrics.

Financial metrics, however, are far from the only measure of success in a business. Customer satisfaction, brand reputation, employee engagement, social and environmental responsibility and good governance are also critically important considerations which can make — or break — a business. 

Understanding how the different metrics relate to each other and how a shift in one metric can affect the outcome in another is key. How business leaders analyse the interpret the data is therefore critically important. 

Technologies such as business intelligence tools, artificial intelligence and machine learning, robotic process automation and cloud computing will also help businesses to measure and keep track of key metrics to ensure more effective financial reports. 

For more information on cloud finance solutions, visit the Sage Intacct webpage, or click here to book a free 30-minute demo to see Sage Intacct live in action.

This article was sponsored by Sage.