Various key figures are important in business administration; they are used to assess a company. Key figures can help to identify problems, to determine operational strengths and weaknesses, to control and to obtain information. Key figures can be used to document or coordinate important issues in a company. They provide condensed information. Whole key figure systems are used in trading companies, but also in production companies. Some companies publish their own key figures, which can be determined using the annual financial statements. The key figures are often based on accounting rules that differ from country to country. It is therefore not possible to compare companies from different countries on the basis of key figures.
Importance of key figure systems
According to gradchem.com, key figure systems enable the summary of key figures that are related to each other. Important key figure systems are above all the ZVEI key figure system, the RL key figure system and the DuPont key figure system. In comparing companies and in benchmarking, key figures and key figure systems are of particular importance. In benchmarking, the key figure of the best company represents an orientation value, which is referred to as a benchmark. Other companies can use this benchmark as a guide.
Types and structure of key figures
A distinction is made between different types of key figures. Business management single values, differential values, sum values and mean values are used. The informative value of the respective key figures defines their information content, for example total assets, company size, contribution margin or cash flow. A relative key figure is the combination of two business values to one figure with increased or specific informative value. A relationship indicator expresses the ratio of two dissimilar but equally important variables, for example the return on equity. An index figure is the comparison of two similar and equal values with a different time reference. Index key figures are mostly based on a base point in time, which is set equal to 100. It enables the analysis of the development over time compared to the base point in time. A breakdown indicator compares two similar but unequal values. Key figures can be in
- Success metrics
- Liquidity ratios
- Profitability metrics
- Key figures on the asset structure
- Key figures on the frequency of sales
be structured. The company’s success is determined using key performance indicators. Relative performance indicators can be based on profit or company value. They take into account the cost of capital. Profit before tax, sales, annual surplus, adjusted annual surplus, cash flow, and trading margin are key performance indicators, Product result, gross profit, total operating profit, contribution margin and personnel output. Liquidity ratios express whether a company is liquid. Such liquidity indicators are cash ratio, current ratio, collection liquidity, asset coverage and working capital. Return on total capital, return on equity, return on sales and return on investment are used as profitability indicators. Key figures for the capital structure are balance sheet figures, for example equity ratio, debt ratio, debt ratio and investment intensity. The capital turnover rate and the inventory turnover rate are indicators of the turnover rate.
Functions of key figures
Metrics serve several important functions. The decision-making function is an important function, because key figures facilitate operational decisions. They provide investment to decision makers as to how the decisions made will affect them. They enable the identification of problems and opportunities in the company so that problems can be dealt with in good time. So that the key figures can fulfill their decision-making function, they must be prepared clearly. However, when aggregating the data, it must be taken into account that detailed information can be lost. Correct presentation and interpretation of the key figures are essential for correct perception and interpretation. The key figures support pattern and problem recognition. Another function that key figures perform is the control function. The planned and the achieved result can be compared with the key figures. Since key figures help in the implementation of decisions, in the behavior control of employees and in the coordination of different areas in the company, they have a coordination function. The behavior control function of the key figures enables managers in the company to induce employees to behave that are positive for the company. For example, employee remuneration can be made dependent on a key figure if employees are interested in increasing this figure. The key figures must be carefully selected so that there are no errors. Finally, key figures also allow an outlook and therefore have a visionary and strategic function.