Financial Benchmarks for Success in 2024

How can you be sure your business is doing well? Luckily, there’s a multitude of ways to tell, many of them through examining different financial benchmarks. We’re here to tell you the financial benchmarks to pay attention to when looking for confirmation that your business is on the right track for 2024. 

What is a Financial Benchmark?

A financial benchmark shows how your business stacks up against your competitors and/or against overall industry averages, in terms of certain metrics such as liquidity, profitability, growth, etc. In measuring your business against these metrics, you can gain valuable insight into what areas your company is succeeding in, and where it needs to improve. Let’s dive further into the different benchmarks you should be evaluating.

1. Growth

As you’ll come to see by the end of this article, benchmarking is often accomplished by calculating a ratio based on a particular metric you want to investigate. Using ratios helps to standardize financial information to make it easier to compare companies against their competitors, or the industry as a whole.

When investigating your company’s growth, one ratio you can look at is your company’s year-over-year increase in market share. You can also look at your company’s annual revenue or total assets to help you determine growth. 

2. Leverage

When calculating your company’s leverage (its level of debt and/or financial risk) you can use a debt-to-equity (D/E) ratio, or debt-to-asset ratio. 

Debt-to-Equity

The D/E ratio is found by dividing a company's total liabilities by its shareholder equity. This information is used to determine how much of a company’s operation is funded by borrowed money. “It can indicate whether shareholder equity can cover all debts, if necessary.”

Debt-to-Asset

Like the name suggests, the debt-to-asset ratio is calculated by dividing a company’s total debt by its total assets. If your calculation yields a number higher than 1.0 (100%) that means your company has more debt than it has assets. A number lower than 1.0 means you have more assets than debt (hooray!)

3. Liquidity

Evaluating your company’s liquidity can let you or your investors know your ability to pay off debt. Liquidity can be discerned through using the current ratio, receivables turnover ratio, or quick ratio. 

Current Ratio 

The current ratio, sometimes referred to as working capital ratio, indicates your ability to pay off short term debt. In other words, it helps you determine how to maximize your current assets to satisfy current debt and other obligations. So, to calculate it, you’ll need to divide your current assets by your current liabilities. The closer this number is to the industry average, the better, as it means you’re managing your assets efficiently.

Quick Ratio

The calculation for the quick ratio is similar to that of the current ratio, only the quick ratio removes inventory from the equation since it can take time to convert inventory into liquid assets. 

So, the formula is: current assets minus inventory & minus prepaid expenses divided by current liabilities. This number reveals the company’s ability to pay currency liabilities with assets that can quickly be converted to cash. 

Receivables Turnover Ratio

This measures how effective a business is at collecting debt and extending credit. If your business has a high receivables turnover ratio, it means you’re effectively managing customer credit. To calculate this, you’ll need to divide your net credit sales by your average accounts receivable. For a more precise read, you can then divide this number by 365 days.

4. Profitability

If you want to determine your company’s profitability, you can look at your gross profit margins as well as your return on assets. Doing so will help you gauge how effective operations and management are within your company. 

Gross Profit Margin

One way to gauge profitability is by looking at your gross profit margin, or the profit made after the cost of doing business has been deducted. 

Return on Assets

This formula helps to determine how well a company uses its assets to generate profit. To find your return on assets, divide your company’s net income by its total assets.

Don’t Stop There!

These are just a few financial benchmarks to look out for, but the list is exhaustive. If you’re looking for more ways to measure your business’s financial performance, check out this list of other important indicators. 

If all these formulas are starting to leave your head swimming, don’t worry, we’re here to help if you need it! We provide financial reporting services that can give you a crystal clear picture of how your business is performing. If that sounds like a service you could use, drop us a line— we’d love to hear from you.