Financial analysts can be in charge of multiple tasks, but one of their most important roles is to forecast. The readable and actionable reports provided within the forecast act as key inputs, based on which a company takes several, consequent decisions for the upcoming fiscal year. These decisions are mostly along the lines of various alterations in budget allocation strategies, as well as changes (or lack thereof) in nonmonetary resource allocations.
Relevant data related to the company and the market, which must be collected, analyzed, and compared to create the forecasting reports, generally come from Key Performance Indicators (KPIs). Like the name itself suggests, these KPIs represent important performance metrics, as would be relevant to the industry, company, and the specific period of analysis.
They indicate how good or bad the business is doing in that particular area, be it in terms of general or comparative analysis. To provide readers with a better idea of what the key performance indicators are that financial professionals work with, we are going to discuss three important ones next.
Operating Cash Flow (OCF)
OCF can be considered as the daily revenue generation data of a business. As a KPI, operating cash flow indicates several factors, which primarily include:
- Ability/inability of the business to maintain positive accounts and meet expenses
- The presence or lack of funds necessary to expand or take the next step towards growth
- Whether there is a need for additional financing, and if so, the amount necessary
Sales growth is a multifaceted KPI, which shows a company’s sales performance over the course of a definite period of time. It’s an instrumental KPI for making Y-O-Y comparisons and even specific quarter-on-quarter comparisons.
It’s extremely necessary for identifying whether the company’s sales numbers have improved or degraded and at which time of each year those changes have occurred. The KPI helps in identifying the areas which require the most attention so that the next year’s sales growth chart can look a lot more impressive.
In order to successfully make sales growth comparison charts across multiple years, it is critical that the analyst calculates and then factors in the CPI inflation rate. For example, most products and/or services that would cost $100 in 2018, costed almost the same in 2019, as the inflation rate was only 0.13% in-between 2018 and 2019. However, the rate of inflation between 2019 and 2020 is 2.06%, which means that the US dollar depreciated by 2.06% in its market value.
While making a sales growth chart, the rate of inflation must be calculated and factored in to properly reflect how poorly or extraordinarily the company is doing, with respect to the present economy.
Net Profit Margin
Net profit margin can be described quite simply as the amount of profit made from every dollar generated as revenue. In other words:
- Total revenue minus all expenses equal the company’s net profit
- The net profit margin can be easily calculated by dividing the net profit by the total revenue generated and then multiplying the result by 100
While comparing the profit margins from previous years to that of the present year, calculating and adjusting in accordance with the rate of inflation is, once again, a crucial step. In fact, as any experienced financial analyst will tell you, inflation calculations are always a crucial part of forecasting in general, even if it is only to compare two subsequent years. They are a key part of understanding inflation.
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