5 key examples of financial performance indicators

It is not enough to encourage performance-focused strategies and to cultivate the guidelines, good practices and tools the team needs to reach its goals and objectivesopens in a new tab.

It is important to run an accurate business diagnosisopens in a new tab (in Portuguese) of the company through measurement methods.

They are what will show whether performance is below expectations. That makes it possible to change course, or to know that everything is going as planned.

There are countless examples of financial indicators provided by economic and management theory. They can give a macro view of the company’s health, and managers can choose the ones that suit them best.

That is why we selected 5 of the most relevant examples of financial performance indicators for you to apply in your business.

But before getting to know these financial performance indicators, watch this video (in Portuguese) that shows how to define administrative performance indicators:

5 financial indicator examples and how to use them in your company

Knowing the main financial ratios is essential for anyone who wants to assess the financial health of their business.

See 5 types of financial indicators. They will be very useful for you to manage your company’s financesopens in a new tab (in Portuguese).

1. Return on investment (profitability)

This indicator shows the company’s earning potential. That is, it shows the return on the capital invested by the organization. For that reason, it is one of the most relevant financial management indicators for any type of business.

The formula that measures it is a ratio between net result and total assets or the initial investment, depending on the stage the business is in.

It is expressed as the profit margin obtained by the company divided by the investment made during a period.

When the return is below what the company’s top management expected, it should consider new strategiesopens in a new tab to attract customers and win more market share.

The formula for return on investment for a business in its initial stage is:

Profit in the period / initial investment

For example: Imagine someone opens a restaurant and invests R$ 600,000 to do so. During the first year, they made a profit of R$ 80,000.

So, plugging into the formula, we get:

80,000 / 600,000 = 0.13

Multiplying by 100, we reach an annual return of 13%.

2. Profit margin on sales

This is one of the most widely used financial indicator examples.

It is a percentage that describes the company’s operating efficiency. Its formula can be expressed as net result divided by total revenue.

The revenue mentioned refers to the business’s total result in a given period, which can be the amount of sales, the set of services or a combination of both.

The formula for profit margin on sales is:

Profit in the period / revenue in the period

So, using the same restaurant situation in this financial KPI example, say the restaurant billed an average of R$ 80,000 per month. That is 12 x 80 = R$ 960,000 per year.

Plugging into the formula:

80,000 / 960,000 = 0.8 x 100 = 8%

So the profit margin on sales is 8%.

3. Average ticket

You can arrive at the value of the average ticketopens in a new tab (in Portuguese) in two ways: through the number of sales or through the number of customers.

The formula takes the total sales value (revenue) in a given period and divides it by the number of sales or customers in the same period.

This information suggests your company’s efficiency index, because it shows whether marketing actions are paying off at that moment.

It also shows, if the index is applied to each salesperson, which customer relationship techniquesopens in a new tab (in Portuguese) have been working best.

That makes it possible to see which salespeople are most skilled and to renew your team’s training in order to raise the average ticket.

The most commonly used formula for average sales ticket is:

Revenue in the period / number of sales in the period

In our restaurant, we saw that annual revenue was R$ 960,000. Say the restaurant sells, on average, 3,000 meals per month. That is 12 x 3,000 = 36,000 meals per year.

Plugging into the formula:

R$ 960,000.00 / 36,000 = R$ 26.70

So the average ticket is R$ 26.70.

4. Contribution margin

This financial performance indicator equals the difference between the gross profit the company earns from a product or service and the unit variable cost (which is the sum of the unit variable cost and the variable expenses).

The contribution margin shows how much each product group contributes to the company covering all of its fixed costs and expenses. That is, without exceeding the company’s revenue.

The formula for contribution margin is:

Sales price - (variable cost + variable expense)

Variable cost is the cost that occurs in the direct production of the meal (in the restaurant’s case) and that varies with the quantity produced, such as the cost of the ingredients used.

Variable expenses are those not directly related to producing the meal, but which also vary with quantity, such as the tax paid on sales revenue.

Let us take the average ticket of R$ 26.70 as the meal’s sales price.

And say the restaurant’s accounting provided the following data:

Variable cost: R$ 12.00

Variable expense: R$ 8.00

Plugging into the formula, we get:

26.70 - (12 + 80) = 26.70 - 20 = R$ 6.70

So the contribution margin of each meal is R$ 6.70.

5. Break-even point

The last of our financial indicator examples is the break-even point. It refers to the unique and long-awaited moment when sales equal the business’s total costs and expenses. So there is no profit, but there is no loss either.

The simple equation comes down to putting the sum of sales on one side so that it covers all costs and expenses (sales = total costs + expenses).

In that sense, from this moment of stabilization on, the business is expected to start making a profit.

The formula for the break-even point is:

Fixed expenses / contribution margin

Fixed expenses are all those that are not directly tied to production and do not vary with it. For example: rent, insurance on the premises, telephone and so on.

So say the restaurant’s fixed expense is R$ 10,000 per month. And, as we saw, the unit contribution margin is R$ 6.27.

Plugging these values into the formula:

10,000 / 6.27 = 1,594.89

Rounding, we can say the break-even point is reached when 1,595 meals are sold in a month. That is: to make a profit, you need to sell more than 1,595 meals.

Want to learn about a few more financial indicators? Then watch this video (in Portuguese):

Financial performance indicators matter to companies because they provide highly meaningful data. That way you can see how the company has been performing, and it also gives managers the grounds to make decisionsopens in a new tab on a more informed basis.

They also show where it would be more interesting to make an investment, or whether it would be worth taking less risk by taking out a loan.

Stratwsopens in a new tab is a corporate performance management software developed by Siteware. It is a robust, easy-to-use tool that shows your business indicators in real time, helping improve performance and find improvement opportunities.

Transform your company’s management with Stratws

Want more tips on performance indicators? Then download our free e-book (in Portuguese): How to use KPIs to track results and engage your team?opens in a new tab