For any business to succeed, it is fundamental that it knows who it is, where it is, where it wants to be, and how to get there.
The success of any business big or small is all about how aware and aligned it is with external factors, whether or not it has a realistic view of its internal competencies as well as competitive advantages, and how it carefully implements and tracks goals vs performance.
Simply put, all businesses must have a strategic plan that goes far beyond just looking at its´ vision or mission statements.
Perhaps every business´challenge in order to succeed is how to link the organization´s strategic goals to performance; how from mere vision-mission statements they become specific, measurable/trackable end points.
There are of course many ideas how this can be done but for the purpose of this article and on the basis of our expertise, we want to focus on the use of financial metrics in the performance of financial analysis as standards for assessing an organization´s performance and in answering questions such as – where it is and where it wants to be.
Talking about strategic financial analysis is synonymous to talking about financial metrics. For years, financial metrics have become standards for evaluating an organization´s performance.
In fact, many decision makers agree that the finance department´s role goes far beyond just doing routinary calculations and processing of payments. The finance department establishes and monitors specific and measurable financial strategic goals for the organization to function more effectively. All these are attained through collaboration between different business units.
Here are 5 examples of these financial metrics:
- Tax Optimization
Every business unit needs to manage, in one way or another, its level of tax liability when conducting business and it is also important to understand the mitigating risks to reduce expected taxes.
This is especially important when looking at new acquisitions or product developments because all these must be weighed against tax implications and net after tax contribution.
When doing financial analysis or any performance analysis, it must always be measured on an after tax basis.
- Profitability Ratio
When doing financial analysis, profitability ratios evaluate or measure operational efficiency. This is a good assessment standard as it points out areas that require immediate remedy by the management. It also measures sales, total assets, and net worth.
- Capital Structure
This is the level that reduces the firm’s capital costs. Optimal capital structure looks at the organization´s reserve borrowing capacity both in the short term and long term as well as potential risks for financial problem.
- Asset Management
This financial metric is basically about effective management of cash, receivables, and inventory as well as payables and accruals. This is important for businesses to do when their operating performance lags behind industry standards/ benchmarked companies.
- Free Cash flow
This represents the cash available after deducting investments and working capital increases from the business operating cash flow. This is a good measure of the financial health of a specific business and it is a good metric to use when a business anticipates substantial capital expenditure in the near future.
The role of finance has continued to become more crucial year after year. Finance has and still is playing a key role in strategic planning process and decision making of the entire organization. Likewise, the introduction of balanced scorecard highlights financial performance as one of the most important indicator for overall business success.
In order to truly link company goals to performance, strategic financial analysis must happen. The five financial metrics mentioned above along with many others help companies establish and track strategies with specific, measurable goals. Subsequently, this leads to a more efficiently run organization with solid and sustainable competencies and advantages.
If you want to know more about corporate financial analysis or strategic financial analysis, visit www.performancecanvas.com or to see a demo of our financial solution that aids in providing timely, accurate, and reliable financial information, email [email protected].
DSPanel offers cutting edge technology platform for business analytics, planning, and visualization. DSPanel designs, builds, and operates with the end users in mind. Performance Canvas was created by DSPanel to answer the unarticulated needs of the market not addressed by previous available solutions. With Performance Canvas, information is transformed into valuable business insights for the business executives to utilize in their decision-making process. DSPanel currently has over 2500 organizations deploying their solutions.