4 Financial indicators that every business should know

4 Financial indicators that every business should know

Nicole Pérez – October 17, 2016

For the financial health of an organization it is important to assess four key indicators: solvency, liquidity, efficiency and profitability. Through the use of accounting information we can make strategic decisions that will enable us to achieve our goals.


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Solvency

Solvency is the ability of a company to generate funds which cope with the payment obligations under different conditions and terms agreed with third parties. It can be measured through the “solvency ratio” which is the quotient of the division between total assets and exigible assets. In short, it is to have real and sufficient resources to support the debts incurred, even if these goods are different to cash.

Liquidity

On the other hand, Liquidity refers to the necessary cash that a company needs to pay the commitments. To have liquidity, solvency needs to come first.

“Any business that has liquidity is solvent, but not every solvent business has liquidity”, Miguel Miranda.

Liquidity depends on two factors: 1. The time required to convert assets into cash and 2. The uncertainty in time and value to convert those assets into cash.

Profitability or Cost effectiveness

The third indicator is the Profitability. This measure compares the level of profits against the resources used to achieve them.

Efficiency

Organizations seek business excellence and this can be achieved through Efficiency. For this purpose it is important to:

  • Take people into account
  • Promote talent for results
  • Take time to do tasks that add value to your organization
  • Have real-time and valuable information
  • Work with effective processes

These four indicators are needed to ensure the success of a company. However, maintaining success requires timely decisions based on reliable information.

Only with LOVIS EOS is possible to obtain reliable and timely information, thanks to the synergy between processes, technology and people.