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Steering With Key Figures: How To Navigate Your Business Through All Situations

25 January 2022

Contribution by Volker Doberanzke, PhD, Numarics Chairman of the Board of Directors and Professor of Finance and International Management

What are the most important parameters for managing your company? What are the characteristics of these key figures? And how should such key figures be used?

Numarics provides answers.

Key figures are defined as numbers that capture business facts and circumstances in a concentrated form. The terms " performance indicator " and "key performance indicator" are also frequently used as synonyms.

Today, key figures are used in many companies for targeted management. At the same time, key figures are orientation parameters both for the entrepreneur and for external business partners, such as banks, in order to assess the situation of the company. With key figures, different dimensions of the company can be evaluated and measured: The current situation of the company in terms of solidity, the success of the company (profit) as well as the liquidity situation and liquidity requirements.   

Key Balance Sheet Figures

Among the important key figures are the so-called balance sheet ratios. As already mentioned in the name, individual balance sheet figures are compared with each other. Among other things, balance sheet ratios provide information about the financing and asset situation as well as the liquidity situation of a company.

Equity Ratio

The liabilities side of the balance sheet consists of equity and debt; the two together make up total capital. The equity ratio indicates how high the equity ratio is in relation to the total capital. As a rule, the higher the equity ratio, the better the company's credit rating. Furthermore, it is generally true that the higher the equity ratio, the greater the entrepreneur's freedom to make business decisions. On the other hand, however, the higher the equity ratio, the higher the risk for the entrepreneur, since more money is invested in the company.  It is important that the equity ratio is considered "normal" in comparison to other companies in the same industry. Deviations downwards, i.e. an equity ratio that is too low, can lead to problems in negotiations with banks, for example.

Borrowed Capital Ratio

Similar to the equity ratio, the liability ratio measures the proportion of total capital accounted for by borrowed capital (also: debt). The debt ratio is practically the counterpart of the equity ratio. And here, too, the debt ratio should not deviate significantly from the industry average. A too high debt ratio will regularly lead to problems in negotiations with banks. It should also be borne in mind that a high debt ratio is always accompanied by increased interest and redemption payments; these funds cannot therefore be used elsewhere.

Key liquidity figures

The ability to maintain liquidity at all times is of paramount importance for a company. The basis of solvency is the liquidity plan. It records and systematically compares all income and expenses. As a result, the free cash flow is determined. This free cash flow is a very important indicator of a company's ability to repay its debts.   

Other liquidity ratios include the comparison of long-term financing with long-term tied-up assets or the ratio of cash and cash equivalents to short-term borrowings.

In any case, liquidity ratios are among the most important ratios for managing a company.

Key Performance Indicators

Key performance indicators are of particular importance. They show how successfully the company has performed in the past period. In this context, the term "key performance indicator" (KPI) has become established in business management. Important KPIs include sales, profit, EBIT and EBITDA.

Revenue

Revenue is an important indicator from the income statement. It is calculated by multiplying the sales volume of all goods and services sold by the sales price. Revenue is therefore positioned at the top of the income statement. Based on further calculations, additional figures can be determined, such as sales per customer or sales per quarter, etc.

Profit

Profit can be derived from sales by deducting all costs from sales. Profit therefore represents the balance of expenses and income and is thus a decisive factor in the management of your company.

EBIT

EBIT is also a frequently used indicator for smaller companies and stands for "earnings before tax". This indicator is regularly used to compare companies with each other. The company's individual tax figures and interest expenses are ignored in this key figure.

EBITDA

Another important indicator is EBITDA. It stands for "earnings before interest, tax, amortization and depreciation". Translated, this key figure describes the annual result of a company's ordinary business activities without taking into account interest expenses, taxes and depreciation and amortization. EBITDA can also be referred to as operating cash flow and is therefore also suitable for managing a company's liquidity.

Key Figure Management By Numarics

Numarics as a business operating system supports you comprehensively in the calculation of the key figures relevant for you. Via the app, you always have all relevant key figures at a glance and can actively control them: sales, profit, equity ratio, debt ratio, EBIT, EIDTA. This means that you have the essential planning figures at your fingertips at all times.  

Volker Doberanzke, PHD
Numarics Chairman of the Board of Directors and Professor of Finance and International Management
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